The Advent Of Shareholder Activism In India – Livemint – 25-Nov-2014
November 27, 2014 - Uncategorized
On 17 July, the Bombay high court directed Cadbury India Ltd to pay Rs.2,014.50 per share to buy back its stock, 50% more than its original offer of Rs.1,340 made in 2009 to its minority shareholders. It may have been the first and a rare instance of minority shareholders of a company approaching a high court for relief, but in the last two years many more have become active in taking on promoters and managements in cases where their interest has been compromised. The incidence of shareholder activism is more in India than other Asian countries, according to a 22 September report by BNP Paribas titled Asia Strategy. New rules are helping minority shareholders in preventing managements and promoters from using their majority to approve resolutions on related-party transactions (RPTs), the report said.
An RPT is a business deal or arrangement between two parties connected by a special relationship before the transaction. India’s new companies law, which came into force on 1 April, requires RPTs of over Rs.100 crore to be specifically approved by shareholders. “The impact of such legal changes seems to be most visible in India where large frontline companies (for example, Maruti) have sought minority shareholders’ approval for RPTs,” said BNP Paribas report written by Manishi Raychaudhuri and Rajan Jain. In the case of Maruti Suzuki India Ltd, shareholders are preparing to vote on a controversial proposal that had brought minority shareholders together earlier this year. In January, Japan’s Suzuki Motor Corp. said it will invest Rs.3,000 crore in a factory in Gujarat and sell the cars it produces there to Maruti Suzuki India Ltd. It marked a significant change from an earlier plan where the local company was supposed to have built the plant. The announcement raised concerns that Suzuki could sell the cars at a higher price to Maruti than it would have cost the latter to produce them itself. Some shareholders alleged that the proposal was a tactic to shift revenues from the Mumbai-listed company to the offshore parent. Minority shareholders, including institutional ones, came together to oppose the plan, forcing the company to alter its proposal. In August, Maruti Suzuki India said it will seek the approval of minority shareholders to enter into a deal with Suzuki Motor Gujarat, a unit of Suzuki Motor that plans to build a plant in Gujarat. Maruti also clarified through an investor presentation on its website that the Gujarat subsidiary will operate on a no-profit, no-loss basis. A shareholder vote is likely to be held in November, Maruti Suzuki chairman R.C. Bhargava said in September. Reversing resolutions Besides Maruti, there have been at least four other instances this year where minority shareholders have defeated resolutions passed by companies. These resolutions related to proposals such as board appointments and compensation, RPTs, royalty payments and delisting. For instance in July, shareholders were for the first time able to successfully stall compensation proposals of top executives in a company as large as Tata Motors Ltd. India’s largest auto maker failed to get 75% of the minority shareholder votes for a proposal for the payment of remuneration to its former managing director, Karl Slym, who died in January, and two other executives, in excess of permissible limits. In some high-profile cases, minority investors have prevailed. In others, they had to back down or settle for a partial victory. Last week, the Delhi high court dismissed a case filed by the Childrens’ Investment Fund (TCI) against Coal India Ltd, ending the high-stakes shareholder activism that challenged the government’s way of running the coal miner and subsidizing prices. In 2012, TCI filed multiple cases against Coal India and the government to prevent the company from signing fuel supply agreements with private firms guaranteeing then lower than market prices. TCI also questioned the pricing policies followed by Coal India. Fairer terms After a long-drawn-out battle and with support from independent directors, TCI managed to force the world’s largest coal miner to introduce fairer terms and conditions in the power purchase agreements, but failed to change the wider governance culture at the company. TCI finally exited its holding in Coal India, which led to the dismissal of their case last week. Even so, activism from institutional shareholders is rising, albeit slowly. The number of votes on shareholder resolutions by domestic mutual funds (MFs) has also increased to 61% in the 2013 proxy season compared with 54% in proxy season 2011, according to a study by Institutional Investor Advisory Services India Ltd (IIAS), a proxy advisory firm. This increase has been prompted by the capital markets regulator Securities and Exchange Board of India (Sebi), which in 2011 made it mandatory for fund houses to disclose how they have voted on shareholder resolutions, said the IIAS report of 29 October. To be sure, not everyone is impressed with the performance of mutual funds on the voting front. “Positive activism can certainly bring change. But I think the MF industry has to be more active and not remain a passive spectator, as it is presently,” said Ashok Bakliwal, former president of Bombay Shareholders Association, a lobby group. Industry experts also say that while minority shareholders have been active in raising their concerns, large institutional shareholders and lenders are still lagging behind. “We need lenders (more so the public-sector banks) and large shareholders like LIC (Life Insurance Co. of India) to be more activist. Shareholders and lenders have the right under the company law to demand changes to the board, management, capital structure, etc., that ensures great governance and long term sustainability of the company,” said Shriram Subramanian, founder and managing director of proxy advisory firm InGovern Research Services Pvt. Ltd. Responsible investing While the new companies law and other regulations introduced by Sebi have ensured that corporate governance at companies is improving, the institutional shareholders need to be more responsible investors, Subramanian said. “The role of lenders is mostly restricted to the financial aspects of the company, but private equity investors, larger shareholders and even market analysts can play a big role in enforcing good governance,” said corporate lawyer H.P. Ranina. “Unfortunately in India, shareholder activism is still at a nascent stage.” A September report on corporate governance in Asia by Asian Corporate Governance Association ranked India seventh out of the 11 Asian markets, suggesting that the country still lags behind peers in setting and implementing governance standards. Hong Kong and Singapore jointly topped the list. Still, India’s score has improved between 2012 and 2014, the report said, stating that the quality of corporate governance in the country has improved due to tightening of norms by regulators.