Shareholder's voice gets louder

Stanza 481 of the Tamil Classic Thirukkural states that “at the right opportunity, the king could succeed easily in his campaigns”.

It emphasises the choice of right time and opportunity, especially by an administrator, to attain success. Shareholders appear to be thinking that this is the right time to take on corporate India and ask the management questions that could embarrass them.

A few months ago, The Children Investment Fund (TCI) took the Coal India management to task for bowing to government servants on matters such as pricing and fuel supply agreements. But now activism is being triggered on different aspects in various eclectic forums.

The Institutional Investor Advisory Services India Ltd (IIAS), an independent think-tank that advises institutions on corporate issues, has advised shareholders of Infosys to vote against a resolution seeking the reappointment of its statutory auditors.

The IIAS has recommended that an auditor should be rotated every six years to ensure transparency. But the present firm had been Infosys' statutory auditor for 14 years and the audit partner has been the signing partner for six years.

Corporate governance

Earlier, not many eyebrows were raised over the reappointment of auditors. The company's institutional shareholders have also called for top-level changes in the management and could also push for returning the excess cash on the balance-sheet to shareholders through either a higher dividend payout or a buyback offer.

The IIAS report has also expressed reservations over one of the independent directors having stayed on the board for 12 years. Investors, foreign and local, agree that heightened levels of shareholder activism could yield results. Foreign institutional investors (FII) circles in India too have begun to ask blunt questions about governance issues in listed public sector units (PSUs).

The Reebok controversy on top management diverting stocks to secret warehouses — this is a new one for scams — has all the makings of a soap opera with no visibility as of now as to who the real culprit is. The role of the auditor is already being looked into by the regulators.

Some minority shareholders of Satyam Computer Services have protested against the share swap ratio they were offered in the proposed merger with Tech Mahindra. In 2011, when Hero and Honda announced their divorce, various shareholders had raised questions about the lack of clarity over royalty payments and corporate governance issues.

All these developments bode well for the corporate governance movement in India and the voices will become louder in the days to come.

Companies Bill 2012

If small shareholders need to be empowered, the Companies Bill — which appears to be kept in abeyance due to a needless administrative formality — needs to be passed in its present form. The Bill will assist in adding more muscle to oppressed shareholders to fight.

Sections 245/246 of the Bill permit filing of class-action suits by investors if they are of the opinion that the affairs of the company are being conducted in a manner prejudicial to the interest of the company and its shareholders.

The power of class-action suits can be gauged from the fact that entities holding American Depository Receipts (ADRs) in Satyam were able to force a $125-million settlement through these suits while the Indian shareholder has been left holding the baby.

The Bill mandates rotation of auditors, though the provision that the first rotation can occur after a decade appears dilutive against the intent of the need for rotating auditors.

Shareholder as sleuth

The general feeling that shareholders in India prefer to keep mum rather than voice their protests vehemently and can normally be silenced with a generous dividend seems to be, refreshingly, changing.

The Ministry of Corporate Affairs (MCA) is planning a fresh set of regulations on corporate governance which seems unnecessary as there are tomes of regulations already in place.

Though India has chickened out in implementing International Financial Reporting Standards (IFRS), it is expected that the exhaustive disclosures needed by these standards would one day be thrust upon corporate India.

A small beginning has been made with the Revised Schedule VI of the Companies Act, 1956. This would provide further ammunition to the ordinary shareholder to turn auditor-cum-investigator.

It appears that in the times to come, corporate India would need to be on its feet all the time.

(The author is a Bangalore-based chartered accountant)

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