The recent activism of the institutional shareholders of Sesa Goa and Sterlite, against Anil Agarwals plans to restructure group companies, is a welcome change in an otherwise tame scenario in which institutional investors have by and large played a silent role in company decisions. The investors in Sesa Goa and SterliteFranklin Resources (9.79%), Templeton Emerging Markets (2.44%) and Vanguard Group (1.46%)have told the management of Vedanta Resources that they are uncomfortable with the transfer of the R48,500 crore of debt from Vedanta to the new merged company. Until now, there have scarcely been any examples of institutional investors taking a stand against company managementsthe most memorable being the investors of Satyam and Maytas in 2008 resisting the merger of the two companies, citing the fact that the benefits will accrue to only a dominant few. As of September 2011, 48% of the listed companies on the BSE 200 had majority shares held by their promoters, which gives them near absolute powers, rendering smaller investors (including institutional investors) ineffectual in matters of operations and governance. There has been a background push to empower these investors, however, with people like Anil Singhvi, former Gujarat Ambuja Cements CEO, and Amit Tandon, former MD of Fitch Ratings, starting Institutional Investors Advisory Services (IIAS), a company that seeks to advise investors on how to vote on company resolutionsIIAS scored a major coup last year when, after it got 23% of investors to vote against a resolution by AkzoNobel India, the company announced a buyback of shares and rolled back its royalty hike proposal. Even TV Mohandas Pai, former HR director at Infosys, has invested an undisclosed amount in InGovern Research Services, which conducts much the same operations as IIAS. Even the legal framework could change towards enabling institutional investors to have more say in company decisions, if the Companies Bill is passed. The Bill proposes a number of clauses that would allow smaller shareholders to question decisions made by the management, and allow quicker redressal and punitive consequences in the case of dereliction of duties by people in charge of governance, including auditors. Notably, it also empowers small shareholders to collectively go after majority shareholders or promoters who act in a manner that benefits only the dominant ones.
Enabling smaller investors, including institutional ones, to exercise their rights in the management of a company is the right way forward, and the aggression shown by investors of Sesa Goa and Sterlite could act as a lightning rod to induce others to take a closer look at their own companies.