Minority Investors Make a Mark, Will It Lead to a Good Governance Revolution?
Over the past few years, 80-odd companies have faced the ignominy of having their decisions overturned by collective action of institutional or retail investors. In a remarkable case last week, which could be a turning point of sorts in the battle for better management accountability, large institutions have moved to oust a promoter-family director from Zee Entertainment. 
 
The movement that began a decade ago and has now gathered momentum. The timing couldn’t have been better. Over 15 million new investors have entered the capital market and India’s investor population is finally set to double, three decades after economic liberalisation began. The first flush of liberalisation that began halfway into 1991 was followed by a massive securities scam in April 1992, followed by the initial public offer (IPO) debacle of 1995 when fly-by-night operators vanished with the savings of gullible newbie investors. It drove retail investors away from the primary market for a decade and many shunned the capital market altogether. 
 
For those of us who have covered capital markets since the 1980s, the sense of déjà vu over investors rushing into IPOs again is balanced by the shareholder activism we are witnessing due to regulatory fiat and the empowering effect of technology and networking. 
 
The process started in 2010 when the Securities and Exchange Board of India (SEBI) made it mandatory for mutual funds (MFs) to vote on corporate resolutions and publicise their voting patterns. Almost immediately, three entities that had been waiting in the wings for the SEBI action, set up proxy advisory firms: Institutional Investor Advisory Services India Limited (IiAS), Stakeholder Empowerment Services (SES) and InGovern Research Services. The pension regulator mandated similar accountability in 2015, while the insurance regulator has also introduced stewardship rules in 2017 forcing institutional investors to deliver on their fiduciary obligations.
 
Until this happened, institutional investors usually colluded with dubious managements or did not bother to vote on resolutions, except under specific directions by powerful politicians. Those interested should look up Escorts (Swaraj Paul’s takeover bid in 1983-84), Larsen & Toubro (Ambani takeover bid through Bob Fiscal in the late-1980s), etc. What is happening today is entirely different. E-voting has made the voting process easier for retail investors to make their voices heard. This is best exemplified by Balaji Telefilms where a small group of investors managed to defeat a proposal to increase the compensation to managing director (MD) Shobha Kapoor and joint managing director (JtMD) Ekta Kapoor, without the help from institutional investors.
 
In August this year, shareholders rejected the reappointment of Siddhartha Lal as MD & CEO (chief executive officer) of Eicher Motors with a 10% pay hike when profit and revenue had been impacted by the COVID pandemic. The board has reappointed Mr Lal and intends to go back to shareholders for approval with a revised remuneration package, even while arguing that there was nothing wrong with its recommended compensation.
 
Another big change is the nature of institutional holding in corporate India. The dominance of public sector institutions has ended; private mutual funds and large foreign institutional investors (FIIs), such as pension and hedge funds, are the ones that call the shots and are also accountable to their own investors. 
 
Since annual general meetings (AGMs) are bunched up after financial results announcements, most institutional investors employ proxy advisors to guide them to vote on corporate resolutions which is now a mandatory obligation. This has made proxy advisors very powerful, since ignoring their advice would be extremely controversial and require institutions to build a counter case and convince their own investors of its merit. 
 
In 2011, proxy advisors needed to make their presence felt and they did so by questioning the appointment of independent directors by Wipro and IDFC; over the next few years, they notched up significant victories such as United Spirits (related-party transactions) and Siemens (sale of metal tech business). 
 
The next big change happened when Companies Act of 2013 empowered shareholders by giving them a say in many more management decisions. This was further facilitated through e-voting which records the number of shares voted rather than a mere show of hands. In case the management fails to respond, the Act empowers investors to requisition an extraordinary general meeting (EGM). Importantly, the appointment and removal of directors can be passed by a simple majority of more than 50% of the votes cast until January 2022 (after this, it will require a special resolution with 75% of the votes cast).
 
What has added significantly to shareholder activism are the burgeoning online forums where serious investment analysts are sharing insights and research into management performance and their decisions. Many of these investors are now demanding accountability rather than merely voting with their feet and dumping their shares in response to bad management decisions. A good example is Apollo Tyres where minority shareholders rejected the reappointment of MD Neeraj Kanwar forcing him and his father Onkar S Kanwar to take a 30% cut in compensation before the appointment was approved (in December 2018).
 
Over the years, SEBI has worked at making proxy advisors more accountable, while giving companies a chance to reflect on the recommendations before general body meetings. Its new guidelines that became effective September 2020 require proxy advisors to share their reports with the company concerned and incorporate their comments or clarifications in their reports to clients. The guidelines also require disclosure of potential conflict of interest—an issue that has already vitiated statutory audits through consulting arms of tax firms. 
 
Barring exceptional cases, the rejection of management decisions has mostly been over executive compensation (including stock options to executives of group companies), appointment or reappointment of directors, related-party transactions and corporate actions, such as mergers, demergers or debt restructuring plans that are detrimental to investor interest. 
 
The two exceptions were, probably, Lakshmi Vilas Bank where a coup of sorts saw shareholders rejecting the reappointment of seven out of 10 directors including the MD and statutory auditor in September 2020. In October 2020, shareholders of Dhanalaxmi Bank ousted MD and CEO Sunil Gurbaxani as they felt he was favouring north Indian investors. 
 
It is only rarely that institutional investors have really gone for the kill and pushed for a removal of a promoter MD as happened with Zee Entertainment and DishTV recently. Earlier this week, some of the largest institutional investors of Zee Entertainment, called for an EGM to remove Punit Goenka as CEO & MD. They were also livid at the attempt to reappoint two ‘independent’ directors – Ashok Kurien and Manish Chokhani (the two have since stepped down). To add insult to injury, the Zee Entertainment share rocketed upwards at this activism, indicating which way the wind is blowing. Earlier, Yes Bank, the largest investor in DishTV had sought the removal of Jawahar Goel for various irregularities. 
 
The Zee group, with its large outstanding debt of over Rs11,000 crore and dodgy deals with MFs to hide the pledge of promoter holdings, had remained unscathed for over two decades, including during the Ketan Parekh scam, due to their political clout. The group promoter Subhash Chandra is a member of parliament (MP) who flaunts his closeness to the ruling party. But, with the promoter holding in group companies down to about 5.9% and substantial holding with large FIIs, one of India’s largest media company may no longer be in a position to run these entities like private fiefs. Ironically enough, Invesco Oppenheimer, a US-based hedge fund, which is leading the charge, had come in as a white knight in August 2019.
 
What transpires at the Zee EGM in the next 45 days may be a serious turning point in investor and shareholder activism in India. It is equally likely that corporate India will come together through their powerful industry associations and lobby to weaken regulation. We are headed for interesting times, because the new Indian investor has access to high-quality research, is empowered through e-voting and, thanks to the internet, is no longer a disparate, rag-tag group of individual activists. Depending on the shareholding structure of companies, retail investors have the potential of coming together to ensure better governance or force a change in management. 
 

Comments
sha79
4 weeks ago
Excellent news. This bodes well for good, honest managements and small investors. This is due to the hard work of a small group - honest journos like Moneylife team, a few bloggers, online forums, etc. SEBI also deserves kudos for bringing about this change. I am sure Moneylife team will continue participate in this great reformation in the Indian stock markets.
Gupta10
4 weeks ago
Indeed great progress and it will eventually lead to improved corporate governance at an average level.

Curious what is the revenue model of the advisory firms and whether it is susceptible to conflicts of interest... like rating agencies and auditors.
samwarbah
4 weeks ago
Nice article.
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