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The World Bank’s 'Doing Business' report of 2010 had ranked India 41st in the world on protecting of investors. In extent of disclosures, we got a score of 7 on a scale of 0-10. On extent of director liability, 4. Ease of shareholder suits scored 7 and strength of investor protection index was 6 on 10.
Five years later, the 2015 edition of the same report ranked India 7th in protecting investors. India showed significant improvement in all the sub-indices, especially director liability, which went up to 6. In fact, its rank in investor protection was a silver lining for the country in a year it slid to 142nd position in the overall 'Doing Business' rankings.
How
These hard numbers are both a reflection and an effect of a spirit of activism that has taken root among institutional and individual shareholders following the Satyam Computer Services scandal in early 2009.
Several regulatory measures and investor-friendlier legislation such as the new Companies Act had a big hand in producing that bright spot but not without some crucial help from a fledgling industry led by some professionals-turned-entrepreneurs, one of them even working out of his home, who were prepared to punch much above their weight.
When the Securities and Exchange Board of India (Sebi) issued a notification in early 2010 which required mutual funds to publicise their voting patterns, it was probably not aware that it was sowing the seeds for a new line of business – the proxy advisory firms. Within months, two entities, in Mumbai and in Bengaluru, came into being to help institutions deal with voting on company resolutions.
Who
Ace dealmaker Anil Singhvi and Amit Tandon, then still India head of Fitch Ratings, came together to float Institutional Investor Advisory Services India Ltd (IiAS) It was incorporated in Mumbai on June 24, 2010. “It is a day job for me, passion for him,” Tandon said of Singhvi’s role.
While Tandon took a few months to come on board, the duo would spend the next several months in hiring people, threshing out the business model and communicating with investors before putting out first reports in 2011.
Meanwhile, Bengaluru-based InGovern was quickly off the blocks. Founder Shriram Subramanian, who cut his teeth with Infosys Consulting, had first-hand experience of what the World Bank report said of doing business in India when he went to incorporate. Ingovern applied for incorporation in June 2010 but took four months to get the certificate. ”The RoC (registrar of companies) had an objection to us naming the company InGovern Governance Solutions Pvt Ltd. Too much 'governing', the bureaucrat probably thought." Subramanian eventually settled for Ingovern Research Services Pvt Ltd.
Early hits
Even as it was sorting the name issues, Ingovern had already trained its guns on Infosys. Of 10 resolutions on vote in its 2010 annual general meeting (AGM), Ingovern recommended voting against reappointment of one of the independent directors, saying his long tenure affected his independence. Not many noticed that report and even fewer recall it. However, a ball had been set in motion.
In early 2012, IiAS made a big impact with its effort in the case of paintmaker AkzoNobel’s restructuring exercise, perceived to be against minority shareholder interests. “Some offshore investors got in touch with us. We got them all in a room. Got them to write to the management. All investors were speaking for themselves but we kind of facilitated the whole thing,” recalled Tandon. The complex restructuring of Escorts was another issue “where we rolled up our sleeves”, he added.
Both cases received wide attention of the financial press, with copious quotes from IiAS and Ingovern reports. Soon, former Sebi official J N Gupta completed the troika of rabble-rousers, launching Stakeholders Empowerment Services (SES).
Now
Since then almost every large corporation and group have seen their filings and proposals analysed threadbare. During a typical proxy season, between June and September every year, these firms put out over 500 reports each. Former fund manager Sanjay Sinha, who now runs an advisory firm called Citrus, said he was not sure if the cumulative impact seen in the corporate governance scene over the past five years can be solely attributed to these firms. Some credit for this rise in institutional and individual shareholder activism should also go to Sebi, he said.
“The biggest contribution of these firms has been in highlighting issues that would have gone unnoticed. Surely, they have brought a larger focus on corporate disclosures such as resolutions in the annual general meetings and annual reports, and ensured they don’t remain only an exchange filing.”
The second big contribution is on appointment and remuneration of directors, Sinha added. Last year, minority shareholders of Tata Motors defeated a resolution to raise the remuneration for three of its directors, on the grounds that profits were inadequate.
Gupta of SES, which had recommended against the resolution, said: “If companies start seeing more participation from institutions, if they start seeing more ‘No’ votes, they will begin to address the governance issues being raised.”
Investors also heeded the Proxies’ calls on Maruti Suzuki’s proposal to shift its plant to Gujarat, United Spirits’ related party transactions and Siemen’s restructuring exercise in the recent past.
Subramanian of Ingovern says apart from educating shareholders on their rights and creating debate on corporate governance issues, proxies have also been able to influence policy. “We have given policy inputs to Sebi, the ministry of company affairs, Joint Parliamentary Committee on Finance and others like ACGA, OECD, etc,” he said.
Tandon draws attention to what he believes is an acknowledgment from the regulator on the work done by proxies. “Sebi decided to register us in three years. That is fairly quick,” he said, adding it took 10 years for the regulator to come up with a similar framework for rating agencies.
Critics
However, corporate India, target of all this action, did not sound very pleased. A Subba Rao, group chief finace officer, RPG Group, feels proxy advisory firms have not made any visible impact on corporate governance practices or to boardroom discussion.
"It is good that they are getting seeded in the system, but they hardly find any mention in any boardroom discussion," says Rao, who earlier had over a decade-long stint in the GMR group. One reason is that the culture of shareholder activism is not deep-seated in India, he added. "You do not see even mutual funds, one of the biggest institutional investors in India, participate in AGMs and question corporate governance practices."
To be effective, proxy advisory firms need to get pro-active legally and make their voice heard through statutory channels such as Sebi, the Reserve Bank, RoCs and the media, says Rao. "They could even buy shares of some companies and participate in AGMs to raise their voice against unfair governance practices."
Forward
Corporate India needs to feel the pain of improper governance practices through either a drop in their valuations or punitive action by statutory bodies. "Only then will proxy advisory firms bite India Inc for lax governance practices," he said.
Investor relations executives said they'd begun taking note of any adverse comment or directive by such a firm to any decision of the company. However, they feel the level of engagement with companies before issuing any adverse directive or advice is very limited. "A stock market analyst who tracks our company or industry keeps in touch with us on a regular basis. Most proxy firms comment on our decisions without engaging in much dialogue with us," says the head of investor relations in a diversified business group with interests in financial services, health care and hospitality sectors.
Some also raise question marks over the revenue models of these firms. "We are clear about the revenue model of stock market analyst firms but not of many of these proxy advisory firms," says another corporate head.
Proxies agree there is always scope for improvement. Subramanian of Ingovern calls their engagement with companies an “ongoing journey”, and believes more people would become aware of the role played by proxy advisory firms over time. Gupta of SES said companies had become much more familiar than before but “for them, we are the villain of the story”.
All three entities said almost all reports and recommendations are shared with the target companies and any comments or feedback on other factual errors are incorporated. On the comparison with conventional stock analysts, Tandon of IiAS said, “Their focus is far more on performance. Ours is on intangibles that drive the business and qualitative aspects. It is a different angle.”
Are institutions ready to pay for such research? While all three claimed they’d several subscribers and were generating significant revenue, they were not prepared to share hard numbers. IiAS said it was exploring ways to monetise the formidable database it has built over the past five years, in addition to subscription revenue. SES said it would focus on governance and was not interested in any other stream of income. Subramanian said Ingovern already had multiple revenue streams and was ready to explore new ones. “We have generated sufficient revenue, though not all from subscriptions, to be in business for the past five years and continue to be around for many years to come,” he said.
KEY CONTRIBUTIONS OF PROXY FIRMS
- Made companies aware that minority investors matter and cannot be taken for granted
- Brought shareholder activism to the focus and made shareholders aware of their rights
- Brought out a debate on good corporate governance and the need for better company-investor engagement
- Active role in policy making giving inputs to regulators, government and global bodies
- Restructuring exercises
- Appointment and remuneration of directors
- Royalty and payments to promoters
- Related party transactions
- Lack of/poor disclosure practices
- Low level of engagement with target companies
- Lack of active engagementwith regulators
- Revenue model
- Conflict of interest
