The year 2017 has become tipping point of shareholder activism in India during which the number of cases, where shareholders dissented over their Board and Management is unprecedented, when compared with previous years. The year even included cases where members of promoter groups dissented against the Board and functioning of the companies, says a research note.
In the report, InGovern Research Services Pvt Ltd, says, "In June 2017, Infosys in an SEC filing, called activist shareholders as a risk to the company as it believed their actions could adversely affect the managements’ working and in turn may devalue the share-prices of the company. On the contrary, we believe shareholder activism should not be a cause for concern for management or boards of companies. Shareholder activism means any shareholder trying to bring about a change that may or may not be supported by the management or the existing Board of the company. It fosters increased engagement of public shareholders with the company. Anecdotal evidence suggests that shareholder activism makes companies more efficient and capital productivity becomes higher."
The year 2017 included such rarer cases where even members of promoter groups dissented with the Board and functioning of the companies. In half of the cases, public institutions as well as private funds donned the mantle of an activist shareholder. Also, thanks to the e-voting facility, the quantum of participation in voting has been more than previous years.
"This shows that institutional shareholders are becoming more and more active in participating in shareholder meetings. We hope that this trend continues into the future on an even greater scale and institutional shareholders, along with non-institutions and retail shareholders, take an even more active role in having a say on the way companies are run," InGovern says.
According to the report from the independent corporate governance research and advisory firm, over the past seven years, investors are found to be increasingly monitoring shareholder meetings very closely. It says, "One investor told us recently that they use the proposals to track how much of debt the company is seeking to raise. Hence shareholder meetings are gaining greater prominence."
Every year, the proxy season starts from January and peaks in September when a bulk of shareholder meetings are held. This year InGovern tracked 10,972 proposals across 1,502 companies across the four types of shareholder meetings – annual general meetings (AGMs), extraordinary general meetings (EGMs), postal ballots and court-convened meetings.
Investors’ scrutiny has increased manifold on the proposals tabled by companies, InGovern says, adding that this is evident by the fact that as many as 45 companies out of the Top 100 had at least one AGM proposal that got more than 20% dissenting votes either by institutional or non-institutional shareholders and in one case, by the promoters of the company. About 10% of resolutions tabled in AGMs of top 100 companies had significant percentage of dissenting votes, which is quite a high percentage compared with any of the previous years, it added.
According to the report, proposals for appointments and remuneration are still the most scrutinised by investors. InGovern says, "Directorial appointments and their remuneration were the most scrutinised proposals by investors in the 2017 proxy season. They comprised 82% of the total resolutions that had a higher percentage of against votes by investors of Top 100 companies. On a more detailed note, proposals for re-appointment of directors retiring by rotation constituted 43% and for appointment and remuneration of directors and others constituted 39% of all dissented resolutions."
During 2017, while companies rotated auditors on regular basis, there was no such rotation of independent directors, especially, those who have completed 10 years on the company board. "The period of three years provided to companies to comply with auditor rotation ended in March 2017. As a result, in the 2017 proxy season, new auditors replaced auditors with more than 10 years of tenure. However, there has been no such effort or urgency by the companies to replace their independent directors who have been on the Board for more than 10 years. This implies that companies take action only to comply with the letter of the law and not its spirit for which it was formed," it added.
Till last year, shareholder activist campaigns in India, however rare, were mostly driven by individuals. This changed in 2017 where a majority of the campaigns were brought by funds. They included funds like Unifi Capital, Florintree Advisors, IDBI Trusteeship and India Horizon Fund. This is a very positive development and in near future we can see institutional shareholders foraying into constructive activism to have their say on company matters, InGovern says.
As per the report, this year the activism was carried out through multiple routes. While Unifi Capital and Florintree Advisors submitted shareholder proposals, India Horizon Fund and IDBI Trusteeship chose the legal route to voice their grievances and the non-controlling promoters of Infosys chose dissenting with the Board through the media.
"Increase in instances of shareholder activism is a clear indicator that
shareholders are gradually seeing themselves as owners than as mere investors. This should act as a catalyst in improving the corporate governance culture, transparency in disclosures and level of engagement with stakeholders across companies in India," InGovern concluded.
Here are some of the examples of shareholder activism...
Raymond Ltd, in its AGM on 5 June 2017, proposed a contentious related party transaction where it wanted to sell one of its prime properties to its Chairman and some of his relatives at a price which was even lesser than 1/10th of the market value. While the company said through the explanatory statement that this would result in a loss for the company, we didn't see any reason as to why the Audit Committee and the Board didn't struck down the deal itself and blocked it from being put for shareholders’ approval. More than 50% of institutional shareholders’ voting rights was put to vote out of which 99.61% voted against the proposal. Also, 92.35% of non-institutional shareholders’ votes were against the proposal. It is to be noted that promoters were not
allowed to vote since this was a related party transaction. Eventually, the proposal failed to pass since a total of 97.67% votes were cast against the resolution.
Alembic Pharmaceuticals Ltd, in August, received a proposal from a group of 1000+ small shareholders under a portfolio manager Unifi Capital. They sought appointment of a small shareholder director. The proposal was first of its kind in India. The company rejected the request of these 1000+ shareholders stating reasons that didn't have any meaningful logic. However, this sets a precedent to the possibility of many such future proposals to appoint a small shareholder director.
MRO-TEK Realty Ltd, in August, on the requisition of a public shareholder, called for a postal Ballot where the requisitionist proposed his appointment to the Board as a non-executive director. He holds about 20% of the equity shares of the company. The reason for this action was a contentious transaction undertaken by the company involving a joint development agreement for developing a land parcel owned by the company. This agreement was signed with an unrelated party, which soon became the new promoter of the company. As per the requisitionist, the terms of the joint development agreement were favourable to the new promoters and not at all in the best interests of the company and its minority shareholders. While the proposal received support from 83.79% voting public shareholders, it eventually failed to pass as the promoters voted against it and restricted it from getting a simple majority vote.
PTC India, through a stock exchange notification dated 15 September 2017 notified an addendum to its AGM on 25 September 2017 in form of a shareholder proposal by Florintree Advisors Pvt Ltd, which sought appointment of Mathew Cyriac as a Director. Although this proposal was similar to the one tabled by Unifi Capital in Alembic, it was being sought under Section 160 of the Companies Act which is the usual route for appointment of a director to the board. Both the proposals by Unifi Capital as well as Florintree Advisors are as a result to the board and management’s inaction to address the undervaluation of equity shares of the company for a long period of time. The board of PTC accepted the proposal and tabled it in the AGM. 40.10% of institutional shareholders and 47.40% of non-institutional shareholders voted in the favour of the proposal which ultimately failed to pass after taking all voting shareholder’s votes into account.
Religare Enterprises Ltd is facing two lawsuits filed by two investors in September. While one of these suits is filed by IDBI Trusteeship Services Ltd in the Bombay High Court, the other is by its shareholder India Horizon Fund Ltd in the New Delhi bench of National Company Law Tribunal (NCLT). Both the suits are against a contentious proposal by the company for investment of Rs500 crore in a loss-making 100% subsidiary Religare Capital Markets Ltd and subsequent writing off of the amount. The proposal was put for shareholders’ approval in September through a postal ballot which around 99.95% institutional shareholders voted against. However, it was passed after taking into account promoters’ and non-institutional shareholders’ votes. India Horizon Fund, through its petition to NCLT, has also sought removal of existing board and appointment of administrator to oversee affairs of the company.
Activism by the Promoters
InGovern says, “As we stated in the beginning of this article, it is not only the public shareholders that are donning the role of activist shareholders but also members of promoters group dissenting against boards and management of their companies. In the past one year, India Inc has seen three such instances in listed entities, two of which are among the biggest companies in India!”
The case of Tata Sons calling EGMs of seven Tata Group listed entities asking for removal of Cyrus Mistry as a Director was one of the rare instances in India where the promoter was publicly seeking ouster of one of its own nominees on the Board. After being removed by shareholders in two listed companies, Mr Mistry voluntarily resigned from the directorship of the five remaining listed entities and filed petition against Tata Sons in the NCLT under Section 241 of the Companies Act. NCLT rejected the request as Mr Mistry failed to satisfy the criteria of holding minimum 10% of share capital of Tata Sons. However, NCLAT has accepted the request and directed NCLT to proceed with hearing the case.
The other well followed case was that of Infosys where its co-founder NR Narayana Murthy alleged lapses of corporate governance against the Chairman and members of the Board. Mr Murthy’s concerns ranged from the excessive remuneration to the chief executive (CEO) to lack of transparency in acquisition of Panaya, an Israeli company and payment of excessive severance fees to former key management persons. While the Board and management tried its best to defend itself from the allegations, the ultimate result was the departure of the Chairman, the CEO and two other Independent Directors from the Board and return of one of the co-founders, Nandan Nilekani to the Board as its Non-Executive Chairman.
The third instance was that of Supreme Tex Mart where members of the promoter family took the fight amongst themselves to the shareholders. The company, on the requisition of a non-controlling promoter (who was the MD of the company till April 2013), called an EGM on 16 August 2017. The requisitionist sought removal of the two promoter executive directors on the Board and appointment of himself as MD and two of his family members (wife and daughter) as directors. While the proposals got defeated after receiving 44% approval, the following days saw resignation of one of a promoter executive director and a woman independent director from the Board.
