1. Editorial: Investors get active

Editorial: Investors get active

Institutional investors are getting more assertive

By: | Published: September 19, 2015 12:19 AM

When Maruti Suzuki India Limited (MSIL) announced, in early 2014, its new manufacturing unit in Gujarat would be owned by its parent Suzuki and the cars ‘sold’ to MSIL, a clutch of mutual funds wrote to the company expressing their concerns over the proposed arrangement. The response was surprising because, typically, minority shareholders in India—whether individuals or institutions—have voted with their feet; rarely has there been any concerted action on their part. Their perseverance paid off and while MSIL has stuck to its decision of the cars being manufactured by its parent, it has made a couple of important changes in the agreement between it and its parent.

Any interaction between shareholders and managements is to be encouraged, as is definitive action by shareholders. Indeed, AGM season this year has seen institutional shareholders opposing resolutions in 18 out of 58 annual general meetings so far; last year, they had voted against resolutions of only 9 out of 65 companies, according to proxy advisory firm Stakeholder Empowerment Services (SES). To be sure, one can’t conclude from this data whether shareholders have been more aggressive this time around in comparison with last year; after all, there may not have been reason to oppose resolutions last year. Nevertheless, given good corporate governance is not so common, it is good that institutions are asserting themselves. That said, small shareholders need to be careful about objecting to managements’ decisions on issues such as remuneration to senior executives. In this context, the ministry of corporate affairs did well to lower the threshold for some resolutions being passed by minority shareholders—to 50%, from 75% earlier. But in general, norms have been tightened. SEBI, for instance, requires all material related-party transactions to be passed by a special resolution with all related parties abstaining, whether the entity is a related party to the particular transaction or not. Again, e-voting ensures that each share is equal to one vote unlike in a show of hands where each shareholder carried a vote. Since shareholders are more empowered today, they need to act responsibly, while proxy advisory firms also need to be more measured in their criticism. There have been instances of MNCs having been chastised by proxy advisories for increasing royalty payments; yet, shareholders of Hindustan Unilever have benefitted enormously over the years, not just through dividends but also capital appreciation. And the Maruti stock has nearly trebled since the Suzuki announcement which many proxy advisories panned. Shareholders need to keep this in mind, else they will lose out in the long run.

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