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Well laid-out plans of companies are pummelled back to the drawing Board as shareholders increasingly ask uncomfortable questions, setting the tone for greater accountability and transparency in India Inc.

By: Ashish Rukhaiyar and Krishna Gopalan
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Try this small exercise. Pick one letter at random from the English alphabet and name a well-known publicly listed company whose name starts with it. Chances are that it would have faced shareholder activism at some point. This is neither a joke nor is it a way to test a person's IQ. In fact, it is an indication of the times we are in and the real possibility of the issue getting extremely challenging for companies that refuse to acknowledge how seriously their lives can be affected, if it already has not.

At the core, shareholder activism is not about irate people who believe they have got a raw deal. Instead, it is about companies being told that their levels of accountability need to be so high that there is no scope for ambiguity, or to never make the mistake of taking the shareholder for granted. For instance, if the financial performance for a year has been unimpressive, a resolution placed to increase the salary of the Managing Director or CEO is like holding a red flag to a bull. This August, Eicher Motors' MD Siddhartha Lal, the man credited with the turnaround of the company, was given the thumbs down by shareholders for a reappointment to the job with a pay hike of 10 per cent. This was when the median showed an increase of just 1 per cent. Finally, he was back but with a maximum salary cap of 1.5 per cent of profits. The message from the shareholders was stern and clear.

Getting back for a moment to the topic of the alphabet, if you just decide to jump to Z, nothing is more prominent than Zee Entertainment Enterprises. This Subhash Chandra-promoted company is in a battle with Invesco, a shareholder with a stake of 18 per cent. With 4 per cent share, Chandra and family are doing all they can to hold on to the company, which simultaneously has a very public legal battle playing out with Zee announcing a merger with rival Sony Pictures Networks. Where this leaves the aggrieved Invesco, which has serious corporate governance issues with Zee's current management, is up in the air.

The story of shareholder activism in India is clearly taking varied forms and shapes. And it is being driven mostly by institutional shareholders—mutual funds, pension funds, insurance companies, foreign portfolio investors—although retail investors are also joining the nay-saying bandwagon. A no-nonsense regulator and a new corporate governance law in the Companies Act of 2013 have contributed to this rise, along with the introduction of e-voting—digital-savvy shareholders are only too happy to exercise their (corporate) franchise in a convenient fashion. However, it's still early days for India. Institutional shareholder activism is deeply prevalent in other parts of the world already, especially in the developed economies. Sudip Mahapatra, Partner at law firm S&R Associates, cites the US as an example: "While activism initially started with hedge funds and a few activist investors, other institutional investors have become very visible participants over the years. There have been many instances where activist shareholders have gained Board seats or forced changes in corporate actions."

India is yet not there, but the journey is proving to be an interesting one.

There are no holy cows today," says Amit Tandon. As Founder of Institutional Investor Advisory Services India Limited (IiAS), a proxy advisory firm, he has seen from close quarters many an issue of shareholder activism apart from having pushed for some as well. Starting with a story of just a show of hands at shareholders' meetings (annual or extraordinary), Tandon, whose firm is a name in the business, is clear that e-voting was one key turning point. "It gave shareholders a sense of empowerment and ensured each vote was counted," he explains. The e-voting part became a reality as a part of the new Companies Act of 2013 (and ushered in on April 1, 2014) and suddenly, resolutions started to get defeated, much to the astonishment of many a management.

An early instance was Tata Motors, when its shareholders rejected a remuneration hike for the then MD (now deceased) Karl Slym and two executive directors. That was in mid-2014 and for a Tata group company to be associated with shareholder activism was a shocker. But not only did it happen, it also set the tone for many more to follow over time. Names like Neeraj Kanwar, Apollo Tyres' Vice Chairman & MD and, most recently, Zee Entertainment's MD & CEO Punit Goenka were confronted with a crisis on a proposed hike in salary. In the case of the latter, it marked the beginning of a battle with the company's largest shareholder, Invesco, which shows no signs of abating. Starting with two directors stepping down, it has turned into a situation where allegations are flying thick and fast, with anything except a resolution in sight.

Mahapatra is quick to admit that "the maximum buzz has been around executive compensation. A lot of rethink is now underway in the corporate world on compensation proposals". Without a doubt, that is the biggest hitch in most cases and one that understandably gets the most attention. But there are many other issues as well, which can hardly be ignored. Take the case of the highly publicised merger in 2016 between HDFC Standard Life Insurance and Max Life Insurance. The deal outlined a payment of Rs 850 crore as a non-compete fee to the Max Group. Proxy firms saw red and there was serious opposition to this. Although the transaction fell through at the regulators' end, the point on the potential windfall was not missed.

That said, the interesting part is the timing. Why are there so many instances of shareholder activism in such a short span? According to Umakanth Varottil, Associate Professor of Law at National University of Singapore, there is a lot more information and guidance available to investors to exert their rights, including through recommendations on voting made by proxy advisory firms. More importantly, he refers to the past 18 months (or so) as being a phase where "there has been considerable market uncertainty, which has prompted investors to pay closer attention to the corporate governance of companies in which they have invested". As he sees it, one way to maintain a check and exercise influence on companies is by putting pressure on the management. "That includes threatening to overthrow the management for a lacklustre performance or governance mishaps. Hence, resolutions for reappointment of directors or even for their removal would tend to be hotly contested in companies that have experienced financial turmoil."

According to Shriram Subramanian, Founder & Managing Director at InGovern, a proxy advisory firm, the increased focus on activism also means that companies no longer place "blatantly egregious proposals" in front of shareholders. "A positive engagement between investors and companies is also forcing companies to be concerned about corporate governance and adopt measures that are shareholder-friendly," he describes. Emails sent by Business Today to the companies which faced shareholder activism did not elicit any response. Zee Entertainment shared its communication to the stock exchanges, which said that the requisition for an EGM called by Invesco is invalid and illegal.

Aggressive shareholder activism [seen in developed countries] will take place in India only when there are hedge funds that are activist or when class action suits are in vogue

Shriram Subramanian

Founder & MD, InGovern

There is no dearth of big names and even a firm like pharmaceutical major Sun Pharmaceutical Industries had to face the rough end of the stick in late 2015. Through its US subsidiary, Taro Pharmaceutical Industries, it was looking to make an investment of $225 million in a wind energy project. For a company of Sun Pharma's size (revenues of Rs 33,498 crore in FY2020-21), this was not an amount that merited breaking too much sweat. Besides, there was a pretty convincing rationale of tax saving since that came with investing in this sector. In addition Sun's promoter, Dilip Shanghvi, had earlier picked up a 23 per cent stake in wind energy player Suzlon and now saw a real opportunity for some synergy. None of that made sense to the analysts tracking Sun Pharma who termed it as an investment in an unrelated area without expertise and some who questioned the "inferior method of capital allocation" and believed the company should "distribute the cash to investors, who can always choose to invest in wind power companies or seek other tax-efficient vehicles". It left no choice for Sun Pharma but to drop the investment proposal.

A little more than a year before that, Maruti Suzuki, the country's largest passenger car maker, issued a press statement that announced the decision of Suzuki Motor Corporation to set up a greenfield project in Gujarat. At first, Maruti faced flak for not getting approval from its own shareholders. It reached a point where some institutions challenged the transaction and eventually the terms were modified. The company had to acknowledge that it was a related-party transaction and only then did the shareholders approve it. The entire process took about a year.

To Sandeep Parekh, a former ED of SEBI and Managing Partner, Finsec Law Advisors, a combination of the rising contribution of institutional investors (such as mutual funds), coupled with an increased scope of activities that need shareholder approval "contributes to a stronger scrutiny of a wider variety of company actions". He says an additional impetus has been provided to shareholder activism by the regulatory reforms introduced by the government. "This inter alia includes increased corporate governance standards, creation of new shareholder remedies and improvement in shareholders' rights. Due to the ease of exercising and enforcement of shareholders' rights, shareholders are now more willing to voice their opinion, resulting in increased shareholder activism."

Due to the ease of exercising and enforcement of shareholders’ rights, shareholders are now more willing to voice their opinion, resulting in increased shareholder activism

Sandeep Parekh

Managing Partner, Finsec Law Advisors and former ED, SEBI

Even fairly routine appointments in large organisations have seen some startling cases. In August this year, former SEBI Chairman U.K. Sinha's reappointment as an independent director on commodities major Vedanta came up for voting. Over 70 per cent of public institutions and 57 per cent of public individual shareholders—comprising 34.5 per cent of total shareholding—voted against it. Sinha was saved the blushes when the promoter group went ahead with his reappointment despite the opposition, which ensured he was back for his last term for a three-year period. The promoter holding in Vedanta is at over 65 per cent, making even a large proportion of the minority shareholding fairly ineffective.

No such luck for Vinod Rai, the former Comptroller and Auditor General of India, who saw a whopping 63 per cent of IDFC's shareholders reject his reappointment as Non-executive and Non-independent Director to the company's Board. The interesting part is that shareholders gave the go-ahead for the appointment of the company's statutory auditor apart from two independent directors. Those familiar with the development say the time taken to unlock value in IDFC (divesting its stake in banks and mutual funds) cost Rai, who had already completed two terms as Chairman. Deepak Parekh, in 2018, again struggled to be reappointed as Director on the Board of HDFC when close to 23 per cent of the shareholders were not in favour of the decision.

Perhaps two instances stand out in this entire story as arguably being the trendsetters. One was the change in ownership of Fortis Healthcare in 2018. At that point, media reports had indicated that two institutional investors were unhappy with the way the sale of the hospital chain was handled and that it was not in the interest of all shareholders. Likewise, the exit of the charismatic and articulate Gautam Thapar, Chairman of fraud-hit company CG Power, in August 2019, was another watershed moment. CG Power was a part of his Avantha Group and the Board highlighted the lack of corporate governance as a key issue for the decision. Both companies had governance issues and low promoter holding.

Professor Varottil of National University of Singapore is clear that corporate governance has evolved substantially in the past decade or so and from a regulatory point of view, gives credit to the Companies Act, 2013, "and substantial improvements in the SEBI listing and disclosure requirements". To his mind, these have had the effect of empowering shareholders to a large extent.

"For example, significant related-party transactions now require the approval of the shareholders, where the related party, such as a promoter, is disallowed from voting. This places considerable power in the hands of the minority shareholders, such as institutional investors, who can exercise much more influence in decision making," he explains, before picking this year as one with several instances where shareholders have defeated resolutions proposed by management on areas such as managerial remuneration apart from related-party transactions.

The shifting of onus from companies to investors and independent directors to now auditors is a reflection of how much the arch of governance regulations has shifted

Amit Tandon

Founder & MD, IIAS

"The shifting of onus from companies to investors and independent directors to now auditors is a reflection of how much the arch of governance regulations has shifted," says Tandon, who is also the MD of IiAS. This September, Dhanlaxmi Bank's shareholders rejected the appointment of its statutory auditor. During the same month, almost 90 per cent of the shareholders of Allcargo Logistics, largely institutions and the public, said no to the company when it wanted to delist its shares. "The truth is no company today is above investors' scrutiny or ire," he adds.

Vociferous shareholder activism also saw the claw-back of bonus in the case of Chanda Kochhar, the former MD & CEO of ICICI Bank.

Obviously, the Indian context is different from the West. Mahapatra of S&R Associates says activism here is still relatively nascent. "Historically, promoter shareholding has been dominant in Indian companies. As institutional shareholding increases, we will see greater activism," he explains.

Shareholders opposed a salary hike for Punit Goenka, MD & CEO, Zee Entertainment Enterprises; the promoters are now locked in a battle with shareholder Invesco for control of the company

Tandon says investors may be perceived as one homogeneous group, but the priority for each is anything but the same. "An index fund will think differently from a hedge fund as will a PE fund. It is quite likely for a PE fund to get a seat on the Board but not an index fund," he explains.

It is early days, though the jury is still out on how quickly things might change as far as shareholder activism is concerned. InGovern's Subramanian says the aggressive version seen in more developed countries is still some time away "and will take place only when there are hedge funds that are activist or when class action suits are in vogue. As of now, it has not taken off as investors will find it difficult to pool resources and lawyers cannot be paid contingent fees."

The role of proxy advisory firms finds favour with Sumit Agrawal, Managing Partner, Regstreet Law Advisors. "It has only benefitted investors and it's difficult to deny corporate governance issues at large companies such as KPIT, Raymond, Finolex, Fortis, Suzlon, Gammon India, Vedanta, among others. The voting decisions of individual investors as well as institutional investors at shareholder meetings are shaped by the guidance and research analysis received from proxy advisors," Agrawal explains.

The reappointment of Siddhartha Lal, MD & CEO, Eicher Motors, with a 10% pay hike was turned down by shareholders as the median hike was 1%. He finally got back with a maximum salary cap of 1.5% of profits

Even in the current issue around Dish TV and YES Bank (here, the bank holds 25.63 per cent in Dish TV and wants an EGM to get in a new set of independent directors and oust Dish TV's MD, Jawahar Goel), it is the initiative of the proxy advisory.

Tandon of IiAS says firms like his are now embedded in the market microsystem. "We focus on governance issues and earlier, while investors tiptoed around issues, today they fire the gun off our shoulders. And then when they see other investors, too, raising similar issues, their comfort to continue doing so goes up."

To Subramanian of InGovern, the role of proxy advisory firms "is to research on and develop both capabilities and capacity on corporate governance matters to provide inputs to institutional investors. Proxy advisory firms also facilitate positive engagement between investors and companies".

Investors, especially the ones with smaller holdings, are reluctant to go on record saying the companies where they are shareholders never like to hear any bad news. One such head of a firm says it is generally possible to get into discussions with the management on areas of corporate governance. "The challenge lies in the high levels of equity ownership that they hold. That makes it extremely difficult to push a point at the EGMs and leaves shareholders like us with no option but to get tough."

What, then, should companies do? There are a few basic points that need quick action. J.N. Gupta, Managing Director, Stakeholders Empowerment Services, says companies must not take investors for a ride when it comes to valuation reports (asset sales or M&A among others). "Many a time, it is just looked upon as a checkbox exercise and does not help the investors. Also, the nomination and remuneration committee must start functioning based on the mandate it has, otherwise all the efforts of the regulator would come to naught," says Gupta quite bluntly.

Viewing the situation, it must be said that a lot of progress has been made. The big worry (a really big one) is how much the interests of minority shareholders are being protected. In companies with large promoter shareholding, the minority shareholders count for very little, which needs to be corrected. The managements in publicly listed companies need to ready themselves for issues that they never quite encountered before. Shareholder activism is not about to go away or even take a break.


Story: Ashish Rukhaiyar and Krishna Gopalan
Producer: Vivek Dubey, Arnav Das Sharma
Creative Producer: Raj Verma, Anirban Ghosh
Videos: Mohsin Shaikh