By: Amrit Singh Deo, Sr Director - Strategic Communications Practice, FTI Consulting
Till recently, only Indian companies wanting to raise capital outside the country took a hard look at their corporate governance practices in expectation of heavy external scrutiny. Increasing international institutional investments in India’s high growth companies created a similar demand for greater transparency and disclosure standards among India-listed companies. If early indications are anything to go by, this trend is seeing further strengthening - with US-style shareholder activism gaining favor with international institutional investors in emerging markets across Asia, including India.
There are three inter-connected developments or factors that indicate increasing instances of shareholder activism and hopefully, a subsequent rising of the bar for corporate governance and disclosure standards in India:
The first key factor is INSTITUTIONAL MONEY BACKING ACTIVISM. FTI Consulting polled 100 international institutional investors, who collectively manage US$1.7 trillion of investments across the Americas, Europe and Asia, to gauge their view about shareholder activism. Unsurprisingly, an over-whelming majority favoured US-style activism, with over 80% saying shareholder activism adds value to companies targeted by them – as they act as checks to corporate actions and are seen as catalysts for change. Research of previous years too demonstrates a rising trend of institutional investors’ consistent backing to shareholder activism in fast-growth economies with relatively weak capital market controls, as compared to the traditional developed markets where they have focused in the past.
The second factor is FRESH REGULATIONS SUPPORTING ACTIVISM. A favourable investor sentiment towards shareholder activism is matched by a catch-up of the regulatory eco-system. In India, the New Companies Act paves the way for class action suits in the future. Capital market regulator SEBI’s (Securities Exchange Board of India) mandate to make e-voting facility compulsory for listed entities and its directive to mutual funds (domestic institutional investors) to disclose voting decisions along with supporting rationale have caused a fundamental shift in capital market agent behavior. Amendments to Clauses 36 and 49 of the listing agreement, by SEBI, have laid down specific standards for timely, quality disclosure; attempted to reform board composition by restoring the ‘independence’ of the independent director, made maintenance of high disclosure standards a board-level responsibility, mandated whistle-blower protection and clearly identified related-parties so that conflicts of interests are clearly resolved. Insider Trading regulations have been further strengthened to ensure that material, price-sensitive information are uniformly available to all shareholders and prevent market abuse. Changes in Clause 49 in particular, clearly require corporate boards to develop communications capacity to explain corporate actions, better articulate business strategy, defend their positions and proactively engage with multiple stakeholders. Deviations against clearly mandated behavior will trigger activist responses, from minority shareholders.
The third factor is SHAREHOLDER VOTING AGAINST MANAGEMENT RESOLUTIONS. According to India-specific data with www.nseinfobase.com which tracks instances of institutional shareholders in India banding to vote against management resolutions, there were 32 such instances in 2013, when at least 50% of institutional investors banded together to vote against board-sponsored resolutions. In 2014, within one year, this figure had risen to a staggering 448 instances - attributable largely to e-voting being made mandatory. This is a telling statistic. Shareholder activism is clearly present and in potent form here.
It may be argued that the legal and business environment in India is not yet conducive for activist – led campaigns as we have seen in the US, but the three factors mentioned above indicate that one must expect increasing activist action by minority shareholder groups on Corporate India. A landmark case - hedge fund TCI’s (The Children’s Investment Fund) campaign against Coal India – is usually held up as an example by skeptics, pointing to the peculiarities of the Indian environment as a natural ‘safeguard’ against activist campaigns . In this specific case, the promoter of Coal India, i.e., the Government of India, was able to stonewall efforts to review coal pricing strategies, even though they ran counter to minority shareholder interests. TCI did finally withdraw the threat of litigation against the company and its directors but the episode brought the issue of shareholder conflict to the fore. I believe it encouraged domestic institutional investors to act in concert, ably supported by local proxy advisory firms, to target relatively smaller game – as it happened when they voted against Maruti Suzuki’s plan to buy cars built at a plant in Gujarat that was owned by parent company Suzuki; or when they voted against director-remuneration resolutions in Ambuja Cements, GAIL and Seamec, to name a few such instances.
In India, all three factors mentioned earlier – Institutional Money Backing Activism, Fresh Regulations supporting Activism and Increasing Instances of Institutional Shareholders Voting against Management Resolutions – raise the spectre of shareholder activism and associated litigation risk for Indian corporations. A shareholder activism campaign is likely to trigger weakened share price, valuations and corporate reputations/goodwill of the company – and is a significant source of enterprise risk. Unless boards and corporate teams recognize the interplay of these three factors and make adequate preparations, they will be continuously pushed to the back foot, ‘playing defense’ to activist actions. Voluntary, continuous, integrated disclosure – like fresh air – is the recommended alternative but the majority of Corporate India is yet to publicly acknowledge its link with corporate health and longevity.
Even for an optimist like me, the tell-tale signs are hard to ignore. India’s first Class Action Suit may well be under preparation and being filed as you are reading this.
VOLUNTARY DISCLOSURE: The author does not advise nor is it engaged in any sort of business prospecting with Indian corporations mentioned in this report.
Attached here is FTI's Report: 2015 Shareholder Activist Landscape - An Institutional Investor Perspective
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