Foreign portfolio investors (FPIs) own a fairly large chunk of India’s equity market, and it is primarily their investments that have driven up the prices and valuations of some of India’s top banks and companies, to where they are today. In fact, in a couple of banks, they own more than 70% of the equity capital. It is, therefore, surprising that the manner in which they are voting on resolutions is being questioned. Recently, a clutch of FPIs voted against the re-appointment of HDFC chairman Deepak Parekh as a director on the HDFC board—on a special resolution—but Parekh was re-elected. SEBI rules require a director over the age of 75 to seek re-election via a special resolution.
To begin with, the FPIs are investors and shareholders and answerable to their unit-holders; therefore, they have every right to vote in a manner that is compliant with their rules and regulations. Moreover, they are free to seek the advice of global proxy advisory firms and follow their recommendations. Institutional funds, which manage large sums of money, cannot be faulted for seeking advice from proxy firms. Moreover, if the rules of these proxy firms state that persons who are on the boards of more than a certain number of companies—‘over-boarding’, as it is called—should not be re-elected, these can’t be questioned.
Indeed, even if there are other issues, for which no rules have been laid out, the FPIs are free to vote either way and to rely on the advice of proxy firms. For instance, the attendance record or age are factors considered by some investors, and rightly so. A couple of directors of HDFC did not offer themselves for re-election anticipating they would not be re-elected. To assume that foreign investors are not taking into consideration local factors, but blindly following the advice of the proxy firms and voting mechanically, is almost being disrespectful; they need to protect their investments and the interests of their shareholders. To suggest they are acting in concert based on the views of Glass Lewis or Institutional Shareholder Services is unfair; they have voted on thousands of resolutions before this. Uday Kotak, vice-chairman, Kotak Mahindra Bank, has suggested that foreign proxy firms should be regulated in India by SEBI, but compelling these firms to register with SEBI would be difficult and unjustified. Moreover, if FPIs want, they can take decisions on their own as several of them already do. Indian companies must remember that all funds—local or foreign—are looking for top quality managements and sound businesses. There is no point complaining about how investors are going to vote or deciding on whether the quality of the advice they are getting is sound.