Shareholders cold-shoulder proxy firms red flags

Mumbai | Updated: Feb 13 2014, 10:41am hrs
SHAREHOLDERS in India have usually tended to vote with their feet and whether theyre institutions or individuals, activism is rare. Also, while they do voice their disapproval by selling the shares, more often than not, stocks have bounced back; the steps taken by managements may seem detrimental to shareholders at that point, but investors clearly believe there remains good value. Indeed, although a host of proxy advisory firms have cautioned shareholders time and again, pointing out proposals that are against their interests, few appear to have paid heed.

Late last month, Maruti Suzuki India (MSIL) said it would not be putting up the new plant at Sanand in Gujarat; it would merely be buying the vehicles from a subsidiary of Suzuki Motor Corporation (SMC) that would sell them to MSIL at cost plus incremental capex. Commenting on the development, InGovern observed that a pliable MSIL board had done minority shareholders an injustice. It looks like the SMC subsidiary will enjoy the benefits of no business risk with assured vehicle offtake by MSIL and assured return on investments, while MSIL will bear the business risk, the note said. The Maruti stock, which lost 8.1% following the announcement, recovered 7% the following day to R1,673.85 and now trades a tad lower at R1,648 levels.

Maruti, together with Hindustan Unilever, has also been at the receiving end of proxy advisory firms for paying out high royalties; IIAS had observed some time back that subsidiaries of MNCs were paying out royalties faster than they were growing revenues. The managements that negotiate the royalty arrangements are employed by the company with whom they negotiate. Loyalty runs in their (MNCs) bloodstream as they sit to negotiate with their own bosses. This is not conducive to head butting, IIAS wrote in late January 2013. While the HUL stock languished for a bit after the firm announced in January 2013 that it would be upping royalties to 3.15% of sales, roughly twice what it was paying then, it subsequently rallied more than 50% by end-July because Unilever announced a buyback at R600 per share.

In February, 2012, Vedanta Resources said it wanted to eliminate cross-holdings and consolidate its stakes in Sterlite, Sesa Goa, Vedanta Aluminium (VAL), Madras Aluminium and Cairn India into a single entity Sesa Sterlite. Despite the apprehension of proxy firms that the new entity would be burdened by debt since the combined borrowings of Rs 50,000 crore on the books of Cairn India and VAL would be moved to it, the scheme was approved by shareholders in a court-convened meeting on June 19, 2012.

Acquisition debt of $5.9 billion transferred from Vedanta Plc to Sesa Sterlite is additional debt burden on Sesa Sterlite shareholders in lieu for the Cairn India holding. Risks associated with Vedanta Aluminium being transferred from shareholders of Vedanta Plc to shareholders of Sterlite and Sesa Goa and this risk transfer may not be adequately compensated, wrote InGovern on February 27, 2012. The stock of Sesa Goa crashed over 10% on the same day and has since then fallen further 8% on account of general weakness across the metal index. To be fair, Sesa Sterlite has, in fact, outperformed metal index by nearly 12%.

The two phase ACC-Ambuja restructuring announced on July 24, 2013 first Ambuja paid Rs 3,500 crore to Holcim International for a 24% stake in Holcim India and subsequently Holcim India was merged with Ambuja so that Holcim Internationals stake in Ambuja went up from 40.79% to 61.39% was criticised by proxy firms. SES is of the opinion that the promoters have bought insurance for future dividend by stripping the company of cash, have got increased control in Ambuja Cements and have retained effective control in ACC although diluting a bit of economic interest. In contrast, the shareholding of non-controlling shareholders of the company is being diluted and at the same time, cash is being distributed to the promoters, wrote SES Governance. The stock tanked nearly 12.5% in six sessions post the announcement and has further fallen by 5% to Rs. 158.40 on account of weak cement industry fundamentals.

The resolution was approved by minority investors despite concerns that Rs 3,500 crore from Ambujas balance sheet being transferred to Holcim.

Approximately 68.52 % of Ambujas public shareholder voted in favour just ahead of the 66.66% mark mandated by SEBI for scheme to go through. In a new rule, SEBI had said on February 4, 2013 that any special resolution can beacted upon only if the votes cast by public shareholders in favor of the proposal, amount to at least two times the number of votes cast by public shareholders against it.

Nitin Shrivastava