Minority shareholders had a few major victories in 2014, but 2015 will have its new share of challenges.
Be it the defeat of the move of Tata Motors to remunerate its directors in July or the wholesale rejection of related-party transactions (RPTs) of United Spirits in December, minority investors made themselves heard loud and clear. But 2014 was also the year in which shareholder activism and corporate governance met their biggest villain in the "ease of doing business".
The roll backs began in July as the Ministry of Corporate Affairs announced several amendments to the regime governing-related party transactions (RPTs). In September, the Securities and Exchange Board of India (Sebi) said it would realign its proposed corporate governance norms fully exempting state-owned firms from the regulations. November's Doing Business 2015 report, which saw India sliding a few places, triggered a fresh round of panic.
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This time the government decided to bring a Bill to amend the requirement of a special resolution of minority investors to clear related party transactions.
With the Bill being passed in Parliament in the winter session, companies now need only an ordinary resolution of non-related shareholders to clear such deals. Activists are upbeat despite these setbacks.
Amit Tandon, founder and managing director, Institutional Investor Advisory Services (IiAS) said: "Tata Motors was the first but, definitely not the last. Though the rules have changed, this will be offset by the fact that a lot of people are now aware of their rights."
Proxy advisory firms such as IiAS have played a key role in creating awareness among shareholders and sensitising companies about corporate governance issues. These firms were born after a Sebi mandate made it compulsory for institutions like mutual funds to disclose their voting. In March, they were also asked to disclose the rationale for voting.
Experts feel while Sebi has taken a lead, other regulators such as the Insurance Regulatory and Development Authority, which governs insurance companies, will begin to recognise the importance of voting by institutions. Tandon of IiAS expects to see regulators acting in tandem in 2015. "We will see far greater coordination between Sebi and RBI (Reserve Bank of India)."
For example, an entity banned by Sebi should not be able to get loans. The new year might see calls for Sebi to realign its Clause 49 norms with the companies law and bring down the "special resolution of non-related shareholders" requirement for RPTs to ordinary resolution of such shareholders. The calls have already begun. The move to populate boards with at least one woman director is expected to come into force from April.
The new amended regime, which will be put to test this year, would require more engagement from both sides. Company boards will have to be more conscious of the rights of minority investors and should guide the management to communicate to them the rationale behind key resolutions before these come up for voting. The onus on minority investors, especially institutions, is bound to go up because their inaction could be costly for investee companies. It is important for management to open communication channels with large minority investors.
Among broad issues that will be taken up by activists would be executive pay, royalty payable to overseas parents, abusive related-party transactions and board composition. Maruti Suzuki's proposal to allow its parent Suzuki own its Gujarat facility could be a flashpoint in 2015.
