Shareholder inactivism

In recent times, Indian policymakers have been in a regulatory overdrive to empower small investors to stand up for their rights. The Securities Exchange Board of India (SEBI) has forced listed companies to reduce promoter stakes and broadbase public shareholding. The new Companies Act allows minority shareholders to initiate class-action suits and vote out corporate actions inimical to their interests. But empowering investors is only half the battle. For it to translate into better governance at India Inc, public shareholders and the domestic institutions which represent them should be willing to speak up, when companies infringe their rights. So far, there is precious little happening on this front.

A recent Business Line analysis showed that a majority of public shareholders simply did not vote in 15 major corporate decisions that called for ballots in the last two years. Shareholder participation was abysmally low even in cases of contentious corporate moves, such as Wipro’s move to de-merge and delist its thriving consumer business or Ambuja Cements’ proposal to use up its cash coffers to buy out its parent’s stake in a group company. Only a tenth of the individual shareholders participated in both ballots. SEBI has tried to remedy this by making voting a less cumbersome process. Thus the top 500 companies have been mandated to offer electronic voting facilities to their investors. But this hasn’t materially changed voting patterns in the last two years. Given that you can only take a horse to water but can’t make it drink, there is probably very little else that policymakers can do to shake small investors out of their apathy.

But one area in which regulators can do more, is in forcing domestic institutions, such as mutual funds and insurance companies, to take a more active interest in the governance of companies they invest in. In 2010, SEBI made it mandatory for mutual funds to disclose their voting policies with respect to their investee companies. However, these disclosures have only served to show how little interest funds actually take in their portfolio companies. Research by proxy advisory firm Ingovern shows that mutual funds abstained from voting in 51.5 per cent of the cases and voted with the management in 47 per cent; only in 1.5 per cent of the cases did they vote against the management. While mutual funds prefer to play it safe, domestic insurance companies don’t even speak up on governance issues; they also make no disclosures of their voting policies. Even in the recent furore over Maruti’s related party deal, Life Insurance Corporation, the largest domestic investor in the firm, never made its position public, choosing to take up the issue ‘separately’ with the management. If institutions acted as good role models, small investors may be encouraged to stand up for their rights.

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