Why India Needs Activist Shareholders

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Over the past year, the ministry of corporate affairs, and the Securities and Exchange Board of India (Sebi) have implemented several key regulatory changes to make companies more accountable to shareholders. But the provisions on corporate governance and minority rights will have teeth only when India’s institutional investors—insurers and mutual funds—take the lead in exerting their rights. Unfortunately, this class of investors has been conspicuous by its silence on key corporate issues.

edit-web-active shareholders--621x414In its latest move to address the problem, Sebi has asked mutual funds to record “specific rationale supporting their voting decision (for, against or abstain) with respect to each vote proposal” and disclose these records on a quarterly basis. Sebi’s latest directive comes three years after it had asked mutual funds to start playing an active role in exercising their voting rights in companies where they held shares, and disclose information related to their voting record on an annual basis.

Despite Sebi’s earlier directive, the participation of mutual funds in voting decisions has been dismal. But the disclosures of voting records brought the extent of passivity of asset managers to the fore. An analysis of mutual funds’ voting patterns by advisory firm InGovern released last year showed that of the total proposals that came their way in 2012-13, fund houses abstained from voting in 52% of the cases, and voted in favour of 47% of the total proposals. They opposed only 1% of the proposals. Mutual funds are entitled to support, oppose or abstain from voting but it seems most of them prefer to choose the easy way out by abstaining. While smaller fund houses were more frequent absentees, even the country’s second largest fund house, ICICI Prudential Asset Management Co. Ltd with assets worth over Rs.1 trillion, abstained from voting 91% of times in 2012-13.

To be sure, there are exceptions to this trend of passivity. Earlier this year, when MarutiSuzukiannounced its plans to allow its Japanese parent Suzuki to set up a fully owned subsidiary in Gujarat, and to source products from it, leading mutual funds and insurers united in their opposition to the proposal forcing the Maruti board to offer a vote to minority shareholders. Last year, state-owned insurer, Life Insurance Corp. of India had voiced its opposition to the move by Ambuja Cementsto acquire a majority stake in ACC Ltd in a complex restructuring deal involving payments to Swiss parent Holcim Ltd. Such exceptions are rare in the annals of Indian corporate history.

Most asset managers in India shy away from taking a stance against promoter interests, and fail to stand up for the rights of minority shareholders. Along with a class of truly independent directors, institutional investors can potentially be the best bulwark against manipulative practices by errant promoters. In several mature markets, fund managers have played an active role in demanding greater transparency and in improving corporate governance standards. It is often said that the California public employees’ pension fund (CALPERS) has been more important than the Sarbanes-Oxley Act in raising the bar on corporate governance in the US.

India is still grappling for institutional fixes to many of its economic problems but it is clear that large institutional investors have a key role to play in shaping corporate governance outcomes in the country. At the moment, because of the overwhelming influence of promoters on board decisions and the conflict of interest in opposing board resolutions (given that large corporations also account for a significant chunk of a mutual fund’s corpus), asset managers tend to shy away from playing an activist role.

Hopefully, Sebi’s latest directive will invite greater public discussion on this issue, and the greater scrutiny of their actions will force fund managers to be more proactive in defending the rights of the small investor. Mutual funds should realize that they can find new customers once they discover their own spine, and start acting as true trustees should.
[ HT Media]

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