Indian companies facing wave of shareholder activism

Diageo is the latest in a string of companies to feel the force of investor displeasure in India, as the country experiences a surge of activism by minority shareholders.

Last week the world's largest spirits group was dismayed when minority shareholders of United Spirits, its recently acquired Indian subsidiary, rejected a proposal to make, sell and distribute spirits with some of the brands of its UK-based parent company.

Two other large companies, Tata Motors, an arm of the Indian salt-to-steel Tata conglomerate, and the Indian arm of Siemens, the German engineering group, have also had shareholder resolutions rejected by minority shareholders in recent months - developments virtually unprecedented in Indian corporate history.

Minority shareholders are taking advantage of new capital market rules to defend their financial interests.

The mood of defiance has also been fostered by the emergence of three new companies, which were established to advise pensions, mutual funds and other institutional investors on how to vote in the shareholder resolutions of those companies they invest in.

"We are seeing shareholders being a lot more engaged with companies and voicing their opposition with a vote, rather than just meeting the chief financial officer, and saying 'we are not happy with it,' " says Amit Tandon, founder and managing director of Institutional Investor Advisory Services India, one of the new advisory companies.

"Changes in the regulations and the environment have meant that patterns of behaviour have changed," he adds.

For decades, Indian business families have treated their stock market-listed companies as personal fiefdoms, with little regard for corporate governance, or fair treatment of minority shareholders. Tycoons have enjoyed jet-setting lifestyles on their companies' tabs, and drained value out of their listed entities through dubious related-party transactions between holding companies and wholly-owned subsidiaries.

Global corporations with listed Indian subsidiaries - a legacy of India's 1970s nationalisation of foreign companies - have been accused of treating their Indian minority shareholders in a similarly cavalier manner as they restructure their local operations.

Minority shareholders previously had little recourse against such treatment, other than avoiding or dumping stocks. Many Indian industrial groups hold their annual general meetings at factory sites in remote rural areas with no accommodation - a significant logistical deterrent to minority shareholder participation. If institutions did send delegates to distant meetings, they were inevitably outnumbered by loyalists of the companies' controlling shareholders - referred to in India as 'the promoters'.

"Most of the time it was show-of-hand voting," says J N Gupta, founder of Stakeholders Empowerment Services, another of the clutch of new advisory companies dedicated to corporate governance. "The promoters used to put all their people in the hall where the meeting would take place, issue them proxies, and the resolution would always be passed."

But new capital market rules and procedures are finally changing the system, making it possible for minority shareholders to have a say, and more actively defend their interests.

India's new companies act, which took effect on April 1, requires all listed companies to provide for electronic voting on shareholder resolutions, allowing minority stakeholders to have their say, without arduous treks to far-flung locations, or unreliable postal ballots.

Mr Tandon adds: "You don't actually have to land up in some shareholder meeting in the sleepiest villages. Now you've got the facility to actually vote from the comfort of your office."

The new companies act also requires all related-party transactions to be approved by up to 75 per cent of the minority shareholders, another step towards greater accountability.

The Securities and Exchange Board of India, the stock market regulator, has also been trying to persuade institutional investors into taking a more active watchdog role to ensure better corporate governance - and protect the interests of their own clients.

Mutual funds in India have been required to vote in shareholder resolutions of their investee companies since 2010. But this year, Sebi began requiring mutual funds to publicly provide a rationale for each of their votes - part of the effort to ensure they effectively use their voting rights.

Taken together, these developments are fostering new challenges to companies in India.

In July, Tata Motors shareholders' rejected the compensation package for several company directors, after the company reported a net loss for the year. Siemens was forced to raise its offer price to buy out the metal technologies business of its listed Indian subsidiary, after shareholders rejected the initial offer.

Yet the struggle for good corporate governance is certainly not won. India's cabinet this week approved several amendments to the companies act, including a provision to reduce the threshold for minority shareholder approval of related-party transactions to 51 per cent, down from 75 per cent now.

Another amendment says related-party transactions with 100 per cent subsidiaries of listed companies need not be put to a vote of minority shareholders, a large loophole that will leave controlling shareholders plenty of manoeuvring room.

The amendments - which could have changed outcomes of several recent cases -must still be approved by parliament. Still, there is no doubt that the market's ecosystem is changing.

Mr Tandon says: "Promoters are going to be much more careful. They know there are going to be a bunch of people like us who are looking over their shoulders."

(c) 2014 The Financial Times Ltd.

04-12-2014