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Companies face hurdles as shareholder activism rises

While smaller shareholders have struggled to get voices heard, institutional investors are increasingly guided by professional shareholder advisory firms.

Published: 07th October 2018 04:43 AM  |   Last Updated: 07th October 2018 04:43 AM   |  A+A-

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Image for representational purpose only.

Express News Service

MUMBAI: It’s time Indian companies, especially family owned and promoter-driven, take serious note of shareholder activism. While smaller shareholders have struggled to get voices heard, institutional investors are increasingly guided by professional shareholder advisory firms.

They have created quite a ruffle, and created hurdles at shareholder meetings.

Deepak Parekh, chairman of Housing Development Finance Corporation (HDFC) was in for a shock when his appointment as non-executive director was opposed by two US proxy advisory firms — ISS and Glass Lewis — reasoning that he holds too many directorships and may not have time for HDFC, and that the board might not be independent.

Apollo Tyres’ shareholders also questioned the high salary of Neeraj Kanwar, vice chairman and MD, as earnings declined. His reappointment was opposed by 27 per cent  shareholders, denying the 75 per cent votes required. This is the first instance when controlling shareholders’ resolution was rejected by minority shareholders.

At Hindalco Industries, it was reported that 18.63 per cent of institutional shareholder votes went against the reappointment of chairman Kumar Mangalam Birla as director, with questions raised over his commissions and variable pay. “There is now increased appreciation and awareness that proposals placed by companies need to be acted on by investors,” says Shriram Subramanian, MD, InGovern.

All three firms are well entrenched names. HDFC is widely held with majority stake owned by foreign institutional investors, while the others are promoter managed. What happens when investors vote to dislodge them on advice from proxy advisory firms? It can be highly disruptive. While activism, per se, is guided by norms these firms follow and reports they present, it can impact share value.

“Today, there is no regulatory oversight or guidance for such reports. Also, who bears the cost of adverse consequences if someone’s recommendations were incorrect, inadequate or motivated by lack of complete facts,” asks Darshan Upadhyay, partner, Economic Laws Practice.

Proxy firms refute this, saying they are registered with Sebi and follow well laid out practices. They also say they are only advisors, not influencers. Another question is whether proxy advisory firms understand the cultural context of Indian businesses. The rebuttal here is that when Indian promoters seek foreign capital, they should accept the way they vote.

Firms stymied
Minority shareholders at three major firms  — HDFC, Apollo Tyres and Hindalco Industries — blocked  resolutions  pushed by promoters. Experts say  much of this was done on advice from proxy advisory firms



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