Indian shareholders are getting vocal and getting better

Nearly 25 years later, the Indian stakeholder seems to be finally coming of age. For long, the institutional shareholders like mutual funds and FPIs remained passive investors. Their role in board meetings was either peripheral or passive. FPIs left it to the proxy advisors on how to vote on various board resolutions.

Sep 28, 2021 09:09 IST India Infoline News Service

One of the earliest full-fledged committees on corporate governance in India was chaired by Kumara Mangalam Birla in 1996. He had just taken charge at the helm of the AV Birla group, after the sudden demise of Aditya Birla in late 1995. In an interview, Mr. Birla made an incisive comment. He underlined that true corporate governance in India would only come about when shareholders get vocal and demand it.

Nearly 25 years later, the Indian stakeholder seems to be finally coming of age. For long, the institutional shareholders like mutual funds and FPIs remained passive investors. Their role in board meetings was either peripheral or passive. FPIs left it to the proxy advisors on how to vote on various board resolutions. However, things have change. There are 3 important changes visible and there are enough cases to substantiate these three major trends.

Stakeholders insist on getting good value for their stock

India still does not have shareholders like Carl Icahn who would call up Tim Cook and demand a higher distribution of cash. Eventually, Apple was forced to increase dividends and do a buyback to distribute more of the cash pile with shareholders. Recently, there have been number of cases in India where stakeholders refused to accept a paltry price.
  • At the peak of the pandemic in 2020, Vedanta tried to buyback the public float at Rs87.50 and delist the stock at the bottom of the cycle. LIC and a bunch of FPIs refused to accept the price. Subsequently, the price was revised to Rs170 but LIC stuck to its demand of Rs320. The delisting failed and the price went all the way to Rs.340. Surely, the shareholders of Vedanta must be thanking LIC.
  • PNB Housing tried to raise Rs.4,000 crore from Carlyle but that ran into trouble. Proxy advisors objected to the deal on 3 counts. Firstly, the price of Rs390 was too cheap. The stock subsequently crossed Rs900 and now trades at Rs650. Secondly, company had done an equity dilutive placement, when it should have ideally done a rights. Lastly, no independent valuation was done and there was no control premium. Finally, PNB did not approve the deal and now it looks unlikely.
  • There were the NCLT cases of Kalrock Jalan bidding too low for Jet Airways and Vedanta bidding for Videocon. In both cases, COC objected to the haircut being too high at 95-97%. For now, the deals are stuck with NCLAT and could go for review.
Institutional shareholders demand more vocal independent directors

Here again some interesting cases come up in the recent past. Three cases really stand out as cases in heightened shareholder activism.
  • Shareholders of IDFC refused to re-elect the high profile Vinod Rai (former CAG) to the board of IDFC. Stakeholders felt that he had not done enough to push the management to hive off the mutual funds business. Rai had to move out.
  • In the case of Eicher Motors shareholders voted against the special resolution to reappoint Siddharth Lal as CEO for another 5 years and enhance his salary. Shareholders were OK with his reappointment but not with the pay hike in a tough year. Being a special resolution it needed 75% votes and was defeated.
  • Institutional shareholders, once again, defeated a resolution to offer 6 million ESOPs to the senior managers of Lupin. The shareholders felt that a tough pandemic year was not the right time for such generous dole outs.
Management clout proportionate to ownership

This was the third kind of shareholders activism, and this was prominent among sizable institutional shareholders. Two recent cases stand out.
  • Invesco Oppenheimer, with 18% stake in Zee Entertainment, called for the removal of Punit Goenka from the post of MD along with 3 other directors. In less than a week, Zee had announced merger with Sony Pictures with a 5 year tenure for Punit Goenka. Invesco has stood its ground as it felt that with 3.44% stake, the former promoter family was exercising a huge clout in company affairs. They have now called for an EGM to vote on the continuation of Goenka as the MD and CEO.
  • In another case pertaining to the same group, Yes Bank called for changing the entire board of Dish TV. Yes Bank holds over 25% in Dish TV while the Jawahar Goel family holds around 6%. It was again a case of disproportionate clout that the institutional shareholder objected to. Dish TV had announced a Rs1,000cr rights issue without taking Yes Bank into confidence. Yes Bank has called for an EGM to change the board.
The issue is not about the outcome of this activism. A sharp rise in shareholder activism is likely to keep independent directors on their toes. It will also force managements to think through pricing of buybacks, open offers and rights in a more rational manner. Above all, it is likely to force the board to adopt a more consultative approach to decision making by taking key stakeholders into confidence for key decisions. In a way, this will be a boost for the corporate governance process.

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