Cut & Thrust: Don’t bear with looters
Truth has a mind of its own. It always emerges and the more you bottle it, the more it wants to burst out and be heard. Equally, crocodiles are always lurking at watering holes, waiting for their unsuspecting prey. Combine these two tales and you have a spanking new narrative of investor activism in India. One that is actually helping vast legionnaires of hapless investors who don’t get heard at all for most part. In recent months, one has seen investor activism using its heft hitherto not visible to aggressively come to the rescue of fellow shareholders.
As the equity cult grows in India with the emergence of systematic investment plans in mutual funds and do-it-yourself bites at equity directly, investor awareness too has grown in proportion. With the Indian mutual fund industry acquiring size and, therefore, influence, it has become a counter weight to fair weather friends — foreign portfolio investors.
For the first time since the early days of unfeterring of the Indian equity markets when Manohar Pherwani’s UTI was the big bull on the bourses, does Indian liquidity matter all over again. Right through these last two years, Indian investors have shown patience and resilience to stay invested. They have refused to panic and run. Which means that they too have come of age, understanding the complexities of equity investment, realising that that you have to be long for better returns. The mutual fund industry too needs to be complimented for ushering in the equity culture and making common folk part with their money and following up by giving them reasonable returns. Indian investors have for years been safe players preferring other asset classes like bullion and real estate to equity and now increasingly commodities too.
In built with awareness is activism in developed markets as you try and protect your investment at all costs. Remember that in India we have seen too many securities related scams and investor wealth has been destroyed before you can say Harshad Mehta or Ketan Parekh. In this kerfuffle, complicity and collusion has always imperiled the financial system as systems and processes in parallel have failed. Sadly the regulator too has been found wanting, always maladroit and flatfooted, waiting for someone to file a complaint, instead of being pro active.
Lately, investor activism has reared its head belligerently in India. A curious mix of individual and minority investors, even founders of companies are thwarting the nefarious designs of promoters and professionals. Actually, it goes beyond the pale, as the watchdog fails in its duties, a new failsafe firewall manifesting itself through activism abounds. Imagine value investor Rakesh Jhunjhunwala taking managements of say a Titan or Lupin to task during their earnings concall, pinning them down on a raft of issues a few years ago. Ravi Venkatesan, recently made co chairman of Infosys where a pitched battle has been fought between the founders and the professionals over breach in value systems and is still to recover from the fracture now agrees that the timing of ramped up compensation packages was awry given that the company and industry aren’t performing in a brittle eco system.
In its submission filed before the SEC in the US, it has cited investor activism as a risk factor which may result in execution peril of its strategic priorities and divert the attention of its directors. Pertinently, this came after the Infy founders expressed their anger and hurt over poor corporate governance standards, severance package of of its ex-chief financial officer and even suspected the payment of hush money to keep him quiet. Infy even went to the extent of saying that the negative media coverage and public scrutiny would also divert attention of its board and management, thereby, adversely impacting the prices of its shares and American Depository Shares.
This is pertinent, for even as the Ratan Tata-Cyrus Mistry joust was being fought with both sides leaking to media, a somnolent Sebi refused to intervene, but shareholder wealth was destroyed across Tata listed firms to the tune of Rs 95,000 crore between October 24 and end December last year. Similarly, Sebi refused to intervene in the Infy case despite many serious issues surfacing.
The buck doesn’t stop with investor activism, for it is the role of the internal watchdogs like independent directors, audit committees and, of course, auditors whose very role is suspect during the jiggery pokery. Partisanship displayed by these individuals and entities muddies the waters, for they are part of the gravy train indulging in loot.
The best instance of all that was wrong with a corporate was Satyam where the promoter claimed that he was riding a tiger and he didn’t know how to get off. Fair enough, but what about independent directors and the audit committee, were they ensconced in the arms of Morpheus? The Raymond case is most intriguing for you have a minority investor who has tasted blood, now whether he was anyone’s stalking horse or B Team is immaterial for he has highlighted real issues relating the promoter’s shenanigans. At least, in this case, the tireless crusade of Bharat and Vishal Patel has resulted in the auditor being junked, the CFO losing his job and SEBI actually asking for a response based on three complaints filed by the minority investors.
In recent times, this maturity has actually made a deep impact:
On February 7 2012, at a court convened meeting of shareholders, many institutional investors either voted against or abstained as a protest against the amalgamation of three unlisted entities with the listed entity. Though the resolution was passed, the post-vote analysis shows that more than 45 per cent of non promoter votes were Against the resolution. If those institutions who abstained had cast their vote against, it would have defeated the resolution and set a precedent.
On February 25, 2012, Vedanta announced a complex restructuring exercise that saw the merger of Sesa Goa and Sterlite Industries. Many institutional shareholders are reported to have protested against the restructuring.
Tata Group owned Indian Hotels classified Shapoor Mistry as an independent director in its annual report of 2012. Such a classification was wrong since Mistry is from the family that has a major shareholding in the Tata Sons and is the brother of Cyrus Mistry. Proxy firms recommended that investors raise this issue following which the company correctly classified him as a non-independent director in the annual report of 2013.
Jindal Steel and Power (JSPL) proposed a resolution in 2012 to hand over authority to its CMD to set the remuneration of executive directors. Once again, due to activism by proxy firms and shareholders, the company withdrew the proposal.
In one of the most celebrated case, The letter sent by The Children’s Investment Fund (TCI) to Coal India was a wakeup call for the government of India, companies and institutional investors alike to take corporate governance issues seriously. Probably for the first time in Indian corporate history has an institutional investor threatened to sue individual board members of a listed entity. The TCI letter brings to fore the larger issue of governance of PSEs that dominate key sectors of the Indian economy, where the government plays the role of regulator, majority shareholder and manager. The government needs to differentiate its roles as regulator, majority shareholder and manager, and lay down clear guidelines that are publicly available. When these roles blur and management decisions (like pricing decisions) are taken by the government, it leads to distortions in the economy. At a specific company-level, it leads to lack of protection of minority shareholder rights. Companies like ONGC, NTPC, IOC, BPCL, Oil India, GAIL, HPCL, BHEL, etc. have had their share of interference from the government.
Which brings us to the moot point — people with fiduciary responsibilities in companies which includes promoters have to steer clear of any hanky panky by following the path of probity and integrity at all times.
Sandeep Bamzai