The Hindu Business Line : Voting with hands and feet

No one votes with his feet with reformatory zeal because be it a domestic investor or foreign investor, at the end of the day both aim for returns on their investments.

S. Murlidharan

Shareholders in India normally exercise their rights by raising one of their hands in support of or against a motion. This embodies the one man one vote principle which may be fine in political democracy but not in corporate.

Corporate democracy postulates reflection of one’s stake in the company in his voting power. And this is what poll is all about.

A person or groups of persons controlling 10 per cent or more of equity carrying voting rights can demand poll either before voting takes place by show of hands or on declaration of results thereof.

Poll demanded

Poll may be demanded if one apprehends defeat despite being in majority in terms of shareholding stake. A proxy cannot vote except on a poll. Therefore when stakes are high, a poll is invariably demanded either by a shareholder or proxy having the requisite voting clout.

While the law takes cognisance of these two modes of ascertaining the sense of the house, a third mode has been rearing its head especially in the corporate governance imagery — voting with feet which consists in disposing of one’s holdings in a company.

But voting with one’s feet isn’t as easy as it sounds because it turns the maxim ‘shape up or ship out’ on its head inasmuch as instead of the non-performer moving out, it is the one done in by such non-performance who moves out.

Investment in equity

In India, foreign investment in equity is in the form of foreign direct investment (FDI) or foreign portfolio investment made by FIIs and money mobilised from abroad by issuing Global Depository Receipts (GDR). Only FDI gets a share of action.

FII and GDR are ousted from the voting arena. In the event, the only weapon available to them is to vote with their feet.

But then no one votes with his feet with evangelistic or reformatory zeal because be it a domestic investor or foreign investor, at the end of the day both aim for returns on their investments.

In the event, they cannot be expected to walk in a huff because if they do so they could be indulging in a bit of self-flagellation, especially in a falling market. The right to vote with feet then is illusory in the hands of the powerless.

It may be a potent right in the hands of a powerful foreign collaborator like Suzuki in Maruti who has brought to the table not only capital but also technology and brand name.

If such a collaborator threatens to walk out, it could spell trouble for the company. But if an FII dumps the company’s shares, the damage would only be collateral in the form of depression in company’s market quotations.

This is not to belittle the importance of FII patronage in the bourses. To be sure, it is the FII patronage that has catapulted many Indian shares into the stratosphere in the past. Therefore FII investments do matter to the extent it amounts to declaration of confidence in the company.

The point however is all investors whether vested with voting rights or others, vote with their feet not with altruistic motives but driven by profits.

No romantic idea

It may therefore not be wrong to say that the idea of voting with feet is rather romantic than real. If this is granted, the larger issue for consideration would be should FIIs and GDR holders be fobbed off without any voting rights. Surely, we cannot be coveting their capital without conferring them voting rights.

In quite a few Indian companies, the FII holdings have been in excess of 50 per cent. Ironically, in such companies the minority have been dominating the majority.

Time we examined the issue dispassionately viewing in the process the much-hyped right to vote with feet concept in its true perspective. One hopes denial of voting rights to FIIs and GDR holders is not a perverse revenge on the invidious practice of providing veto power to foreign directors on the boards of Indian companies having foreign collaboration. Two wrongs cannot make a right.

(The author is a Delhi-based chartered accountant. blfeedback@thehindu.co.in)

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