Friday, December 05, 2014

Shareholder activism in India- a new dawn?

Finally, finally, is something changing in the realm of corporate governance in India? I'm seeming a glimmer of hope.

Three things seem to have made a difference. One, allowing shareholders to vote electronically. This has empowered shareholders who could not be troubled to attend the AGM especially if it happened to be in another city.

Secondly, the recent amendments to clause 49 requiring that related party transactions be approved by 75% of minority shareholders.

Thirdly, domestic institutional investors beginning to flex their muscles.

Shareholder activism has produced some interesting results in recent months:
  • The rejection of the compensation hike proposed for top management of Tata Motors despite the company making a loss
  • United Spirits management proposal to sell and distribute spirits of its parent Diageo was rejected 
  • Maruti Suzuki is having to bring to vote its proposal to set up a manufacturing plant in Gujarat under the auspices of its parent 
Note that RPTs also need to be screened and approved by the Audit Committee. That may not make a big difference given that independent directors are chosen by the promoters. Indeed, not much can be expected of the board in India, given that independent directors are beholden for their appointment to management or the promoter. It is inconceivable that the board can ask for the removal of the chairman or the CEO as these posts are filled by the promoter or they are appointees of the promoter.

But shareholder activism, abetted by the three advisory services that have come into being, could make up for lapses of the board. This seems to run counter to the trend in the US and elsewhere. In those places, shareholders have been stymied by various regulatory hurdles. It is boards that have begun to be more active compared to the best.

We must be careful, however, not to overdo the celebration. Shareholder activism in India can prevent expropriation of minority shareholders.  However, it is not still not in a position to discipline non-performing management.

See this story in the FT.


N S said...

The good words are all well in place but unless and until the investors are financially literate the board structure is going to remain the same. I watched with some consternation as Mukesh eased his kids into the board as directors.
In US, the concept of IOF (Investor Owned Fund) makes more sense as the businesses are not run as family owned. The company is a separate entity after all.
However, the investors back here still look Mukesh as Dhirubhai's son and that image builds more trust than any other gearing ratios and that starts and completes the 'virtuous' cycle of having kids in board along with experts and veterans.
Apart from the corporate governance point of view, isn't it a disgrace to skill and experience when people having lineage as the only qualification make it to the board?
Are Indian investors going to do something about it? That is going to be the pertinent question in the long run.

T T Ram Mohan said...

NS, Couldn't agree more with you. That's why I said in my post that we must bank on shareholder activism, not the board. You must expect the board in India to be a washout in general.