CIRCUIT BREAKER. Will shareholders please speak up?

A new wave of shareholder activism is shaking up some of the world’s largest companies. In the US, activist-investor, Carl Icahn, after mopping up 52 million shares in Apple Inc, has been demanding that the tech giant return more cash to its shareholders. Apple has increased the size of its share buyback programme from $90 billion to $140 billion in 2015, but Icahn is asking for more. Trian Fund Management, a hedge fund managed by Nelson Peltz, acquired a 1 per cent stake in General Electric in 2015 and has been demanding that the company exit its finance business, cut costs and take on $20 billion in debt for share buybacks.

Icahn and Peltz belong to the burgeoning ranks of global activist-investors who buy up stakes in listed companies and then arm-twist them to set their houses in order. They are known to shoot off fiery public missives to CEOs, demand board seats and force companies into spin-offs, dividends and share buybacks that can boost stock prices. In 2014 alone, over 400 global companies were the target of such activist campaigns.

With one of the largest baskets of listed companies, India certainly has its fair share of public companies that fritter away capital on unrelated diversification, hoard cash and divert shareholder funds to group firms. But shareholder activism seems to be in a rudimentary stage in the country. Leave alone activism of the firebrand variety, Indian shareholders seem to fight shy even of exercising their basic rights.

Recent evidence of this came from investor apathy to Maruti Suzuki’s ballot a week ago, to seek shareholder approval for a related party deal with its parent company. Ever since it proposed a transaction to transfer its upcoming Gujarat project to a group firm in January 2014, this has been the subject of heated debate.

Under India’s new corporate governance framework, this was duly put to vote. But despite the criticality of this deal to the company’s prospects, the ballot drew lukewarm response. Ninety per cent of shareholders who voted, rubber-stamped the deal. But the surprising thing was the number of investors who simply ignored the ballot or abstained from voting. Of the non-promoter shareholders who were eligible to participate, 44 per cent did not even turn up to vote.

Don’t imagine that these were lay investors who were unsure of what to do. As it is institutional investors (FIIs, domestic mutual funds and insurance companies) who own 83 per cent of Maruti’s publicly traded shares, it is obvious that a good number of them refrained from voting.

A later report by BusinessLine revealed that quite a few institutional shareholders, after “speaking to the Maruti management” ahead of the vote, decided to abstain from it because they didn’t find it “detrimental to their interests”.

This begs the question: Can’t institutions which are helmed by highly paid professionals make an independent assessment of corporate actions? And if they really felt the proposal was in their interests, couldn’t they vote in its favour?

But then, the Maruti case is just the latest in a string of instances where Indian institutional investors have taken the view that discretion is the better part of valour. Brewery major United Spirits is in the midst of a high profile battle between its board of directors and chairman, Vijay Mallya, over whether the latter should continue on the board, after being a declared a “wilful defaulter” by major banks.

Mallya has refused to step down. But the company’s annual general meeting has come and gone without institutional investors putting up much of a protest.

Such anecdotes apart, the publicly disclosed voting patterns of leading mutual funds show that, when it comes to exercising their franchise on key corporate moves, funds prefer to either go with the management (over 90 per cent of the time) or abstain from voting.

But they aren’t alone in doing this. Insurance companies which are even larger stakeholders (and claim to be more ‘long-term’ investors) in Indian companies, don’t even disclose their official voting policies.

In fact, there have been quite a few contentious corporate mergers, spin-offs, et al in recent years, that could have been easily scuttled by the Life Insurance Corporation of India — the largest domestic institution — given its enormous voting clout. But it has rarely gone beyond “seeking clarifications” through private letters to the management.

It is not for lack of regulatory backing that Indian institutions take the line of least resistance. In recent years, both the ministry of corporate affairs and SEBI have gone all out to give non-promoter shareholders a greater say in the running of listed companies.

SEBI brought in the minimum public shareholding rule which forced promoters to dilute their stakes in listed firms to a maximum of 75 per cent, two years ago. To enable easier voting, companies have been mandated to provide electronic voting platforms. In the last year, the Companies Act and SEBI’s listing guidelines have also been deliberately amended to restrict promoters from voting on proposals that directly interest them.

But to use a cliché, you can only take a horse to water, you can’t make it drink.

So what makes Indian institutions so diffident when it comes to standing up for their rights? Legacy issues could be one explanation. Promoters of India Inc have traditionally maintained a pincer-grip on publicly traded firms. But that has changed in the last five years with the minimum public holding and minority voting rule.

The fact that foreign investors corner about 20 per cent of all outstanding shares in Indian companies, dwarfing domestic institutions (about 10 per cent), could be a reason too. Maybe many foreign investors are of the short-term variety and don’t care about niceties such as long-term wealth creation.

It could also be that domestic institutions prefer to sell their shares if they are unhappy with corporate moves. Or worse, they are loath to compromise their cosy relationships with the management, which gives them access to privileged information.

Whatever the reason, it would be good to see Indian institutions imbibe some of the activist DNA that is doing the rounds globally. Let’s not forget that it was a rare instance of institutional activism (where mutual funds blocked Satyam’s merger with Maytas Infra) that blew the lid on the biggest accounting scandal in Indian history — the Satyam scam.

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