The decision of Essar Energy's independent board committee to reject the Ruia family's proposal of 70 pence a share in the United Kingdom to take the company private was a victory for corporate governance. The decision was also in consonance with the perception of larger minority shareholders that the price offer was nothing but a "calculated attempt to deprive them of a future upside" in the London Stock Exchange-listed company. But Essar Energy was not an isolated case. Shareholder activism has indeed taken deep roots in many developed countries, which is why activist hedge fund investors have taken on behemoths like Apple and Microsoft and have managed to obtain a seat on their boards.
Some green shoots are visible on this front in India as well. Consider what domestic institutional shareholders such as Life Insurance Corporation (LIC) did during voting on Holcim's mega India restructuring plans last year. For the first time, LIC voted against a management-sponsored move as it felt that the deal favoured parent Holcim much more than the minority shareholders of Ambuja Cement. Though Holcim secured a majority of the postal votes, domestic institutional shareholders at least sent a signal that they were eager to shed their hitherto passive image. Similarly, mutual fund companies have made public their strong opposition to Suzuki's move to make Maruti Suzuki's Gujarat plant its wholly-owned subsidiary on the ground that this was nothing but a forced transition of the automobile firm into a trading company. This is also a welcome break with the traditional notion that such investors turn a blind eye when it comes to acting on important resolutions put out by firms. While the merits of mutual funds' concerns need a detailed examination (Maruti Suzuki has contributed to the healthy debate by countering some of the allegations), Indian minority shareholders are at least getting a platform where their voices can be heard. This was missing for far too long. A study by corporate governance research firm InGovern shows mutual funds voted against only 1.5 per cent of all shareholder resolutions in 2013 and abstained from more than half the resolutions on offer.
Another encouraging sign is that the new Companies Act has sought to go a long way in corporate governance and protection of minority shareholders. The mandatory requirement of nomination and remuneration committees, allowing class action suits, and so on will all give institutional shareholders the legal muscle to act on behalf of their investors. Shareholder activism in the Holcim-Ambuja deal, for example, became possible after the Securities and Exchange Board of India enforced the rule through its circular on Scheme of Arrangement under the Companies Act, 1956, in May last year.
But there's no denying that law can play only a limited role. Shareholder activism has been low in India also because, while markets in developed countries are dominated by institutional investors, Indian companies still have a larger promoter shareholding. Therefore, it is difficult for minority shareholders to effectively contest management decisions. But promoters in India would do well to read the writing on the wall, since bulldozing minority shareholders' opposition cannot be a sustainable option. After all, higher governance standards are in the interest of majority shareholders too, since the company gets rewarded with rich valuations.
