The annual general meeting (AGM) for Shriram Transport Finance (STFC) held on August 19 began as a routine affair. What unfolded next was anything but.
The minority shareholders of STFC, an asset financing non-banking finance company, voted against a resolution to re-appoint Puneet Bhatia, co-managing partner and India head of private equity major TPG Capital Asia as a director on the board. The shareholders cited Bhatia’s low attendance in board meetings as the reason.
Shareholders voting out a board member in India is rare. Typically, shareholders, except when they vent their disagreement to promoters or management, are silent spectators at AGMs. Using the power of their vote at company AGMs is unusual.
JN Gupta, Founder of proxy advisory firm SES, said the STFC case is one of its kind. “It reinforces the trend that shareholders have started realising the importance of their vote and no longer voting with their feet,” said Gupta, a former executive director of market regulator Sebi.
“Gone are the days when shareholders used to disinvest due to issues and when nobody used to ask questions. Stewardship guidelines of SEBI will bring far-reaching changes the way companies are governed. Figurative and ornamental directors are no longer valued,” said Gupta.
Proxy advisors heard
The episode also shows that shareholders might be finally taking proxy advisory firms seriously. The decision to oust Bhatia who headed the private equity group for GE Capital India prior to joining TPG Asia in April 2002 came after most proxy advisory firms advised shareholders to vote against the proposition. These firms raised red flags over the low attendance of Bhatia in board meetings.
In 2019-20, Bhatia’s attendance percentages in STFC board meetings, audit committee and corporate social responsibility meetings was less than 50 per cent, according to the proxy advisory firms.
The voting outcome was overwhelmingly one-sided. Overall 57 per cent of the shareholders voted against the resolution. Promoters voted 100 percent in favour of Bhatia’s reappointment. But among the public institutions, 83 percent didn’t want Bhatia on the board.
To be sure, the reason for Bhatia’s ouster isn’t serious enough to alarm STPC’s investors. “One needn’t read too much into this case. The reason why Bhatia wasn’t given a go-ahead by the shareholders is his low attendance. But this is a lesson to board members that they need to participate aggressively,” said an analyst who tracks financial services.
An email sent to Shriram Group seeking response on the issue remained unanswered at the time of filing this story. An email sent to Bhatia seeking his response on the matter remained unanswered till the time of filing this copy.
Episode-2: Promoters bat for Bhatia
The story didn’t end with Bhatia’s ouster. While shareholders voting against the re-appointment of a prominent board member itself was rare, what came after was even more dramatic. A week after shareholders rejected Bhatia’s re-appointment as a board member, Shriram Group renamed Bhatia to the board.
It defended its decision through an unusual press release.
Titled as “Shriram Group appreciates TPG’s contribution to the Group,” the press release termed shareholders’ decision to vote against Bhatia “unfortunate”. “It was unfortunate that recently some of the shareholders voted against his continuance as a director, possibly solely relying on attendance not being very high for the board meetings,” the Group said.
The group defended Bhatia saying he has been representing TPG on the boards of the various companies in the Shriram Group and has been adding a lot of value.
“We, the promoter, the management of both SCL and STFC wish to place on record our appreciation of his efforts that have been put in by him for over a decade, spanning over 15 years since 2006. He has been a director of STFC since 2006, when the first investment from TPG flowed into the Shriram Group, till date,” the group said.
Unusual press statement
Gupta said this press release appears to be a PR exercise by the company to mitigate the impact of the defeat of resolution by shareholders by detailing the contribution of Bhatia, which ideally should have been given in notice.
The promoters and the key strategic partner, Sanlam, a financial services groups based in South Africa, backed the candidature of Bhatia the past and will do so in future also, the note said. “Bhatia has requested some time to consider our request. We plan his formal induction into the Board of STFC at a mutually convenient time, where we expect all the stakeholders to also back him.”
Wanted: good governance
The question here is whether promoters finding backdoor entry to a board member whose re-appointment has been rejected is in the true spirit of good governance?
Experts are of the view that even though there is nothing illegal in promoters re-appointing a board member on the board using their quota, doing so without shareholder approval doesn’t amount to good governance.
“There nothing illegal if a company appoints a person on the board through the nomination route if the Articles (of Association) permit. But, if they appoint a person on the board who has been already rejected by the shareholders without shareholder approval, it is absolutely not good governance,” Gupta said. “The re-appointment has to be done through the shareholders after convincing them about the merit of inducting the person on the board.”
According to Jayant Thakur, a chartered accountant who specializes in securities law, Section 161(1) of the Companies Act, 2013, makes it clear that Board may have powers under Articles to appoint an additional director but that can be of a person "other than a person who fails to get appointed as a director in a general meeting,”.
“Thus, the intent and spirit clearly are that Board ordinarily shouldn’t disrespect the views of shareholders and appoint a person rejected by them,” Thakur said.
The other point is the general principle whether Promoters appointing their nominee is in consonance with principles of good corporate governance. Here, it is often missed that Promoters have as many rights of governance as public shareholders have.
“Appointing a person as their representative as their nominee is as much assertion of their governance rights as others do for their own. In this sense, just as promoters ensuring all board members are their nominees would be wrong, so would be wrong that they are unable to have any nominee on the board. A sense of proportion is thus to be kept in mind while dealing with such matters which is not all about strict letter of law but rather matters of intangible issues of values,” said Thakur.