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What you can ask in this AGM season

Satya Sontanam BL Research Bureau | Updated on July 04, 2021

The MCA allowing companies to conduct annual general meetings online is an opportunity for you, as an investor, to interact with the management. Here’s how you can ask pertinent questions

With the Ministry of Corporate Affairs allowing companies to conduct virtual annual general meetings (AGMs) until December 31, 2021, stock investors in India now have the unique opportunity to attend AGMs of companies for FY21 from the comfort of their homes. This makes it possible for you, if you’re a shareholder, to interact first-hand with the management of companies, get insights on operational performance, its future prospects or even get a glimpse into what other investors are asking — all without travelling to an AGM venue in a far-flung location.

It is a statutory requirement for companies to conduct AGMs every year in which their shareholders adopt financial statements and other important documents, approve the declaration of dividend and green-signal the appointment/re-appointment and fixation of remuneration for directors, key managers and auditors of the company. The Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, give shareholders the right to pose questions to the management in the AGM and vote on big decisions.

If you are eager to take advantage of this one-off opportunity to quiz the management during virtual AGMs this year, you may need to do some homework to prepare for the AGM season ahead. Here, we guide you on what to look for specifically in the key documents of listed companies that are mailed to you before the AGM.

Notice to AGM

A notice inviting shareholders, directors and auditors to the AGM is released at least 21 days before the meeting. This document, in addition to mentioning the time and venue of the AGM, lists out the agenda of the meeting. Here are some specific items to keep an eye out for. The notice, apart from being emailed to shareholders, is displayed on the company’s website in the investor relations section.

Key appointments: An AGM notice will include details of directors to be appointed/re-appointed, such as age, qualification, nature of his/her expertise in specific functional areas, terms and conditions of appointment/reappointment, last-drawn salary and brief resume. In case of auditors too, basis of recommendation is mentioned in the notice along with remuneration details.

You may need to sit up and take notice of an existing management that is staying on for too long, or if a new appointee seems to lack requisite qualifications. In September 2020, several shareholders of Lakshmi Vilas Bank voted against the reappointment of the managing director and chief executive, as well as other directors and auditors at an annual general meeting, possibly due the deterioration in the bank’s finances under its incumbent management.

ID appointments: Independent directors are expected to play a key governance role in listed companies by ensuring that management decisions are in shareholders’ interest. While vetting new independent director appointments, shareholders need to know if the director has any commercial relationship with the company or is related to the promoters or their family, which could mean his or her independence is compromised.

Institutional Investors Advisory Services (IiAS), a proxy advisory firm, has suggested investors vote against appointment of an independent director who is a family member of any outgoing independent director.

Corporate actions: Certain key corporate actions like mergers, demergers, schemes of arrangements and buybacks, which require shareholder approval, are also put up for vote in AGMs. The notice to AGM, in addition to detailing these resolutions, also provides explanatory statements to most items. Investors will be better off going through these statements as they provide justification from the management on why a particular action is being proposed.

For example, Infosys’s notice to its AGM for FY21 includes a resolution to buy back shares. The company states in its explanatory note that the Board decided to return approximately 85 per cent of free cash flows cumulatively over a five-year period to shareholders, through a combination of semi-annual dividends or share buybacks or special dividends. This intention of the management is a key input into your investment decision to hold or add to your holdings in the stock and wouldn’t have been clear just by reading the resolution.

Annual Report

Companies send out annual report to shareholders at least 21 days in advance of the annual general meeting. The annual report is the shareholders’ key go-to document detailing the company’s financials and operations, apart from containing certifications from the company’s auditors and directors on the fairness of the financial reports. Here are the key checks.

Financials: The most important section is obviously the financial statements themselves that include balance sheet, income statement, cash flow statement and notes to accounts pertaining to the reporting year as well as the previous year. Analysing the trends, significant shift in the reporting of an income or an expenditure and connection between one line item and another can provide more details about the operations.

For example, an investor, at Infosys’ recent annual general meeting last month, asked why the depreciation charge increased despite fall in the plant and property value in the balance sheet. To this, the management replied that the company invested significantly in laptops and new technology to enable a work-from-home option to employees, for which the useful life is much lower than traditional plant and machinery. This consequently resulted in higher depreciation cost.

Related party transactions (RPTs): One of the key ways in in which unscrupulous promoters or managers divert company funds to private pockets is through RPTs. While these transactions can be completely normal and legal, if done on an arm’s-length basis, that is, conducted as if the parties are unrelated, governance issues often lurk in RPTs. Loans to promoters or their relatives, the company leasing premises or assets from promoters or managers, the company buying or selling products or services from group entities or promoters – most of these figure in RPTs.

Sterling & Wilson Solar’s promoters delaying the loan repayment to the company is a known case of company’s funds being blocked due to an RPT. The company extended the timeline for repayment of loan a couple of times. The proxy advisory firm inGovern suggested that shareholders oppose this RPT in AGM citing that the terms of the loan were changed. It is a different thing that shareholders approved the RPTs in the AGM last year.

Auditor’s opinion: Paying attention to the auditor’s report, which may contain a qualified opinion, or sections titled ‘emphasis of matter’ and ‘key audit matters’ in the audit report, may also help investors understand if the company is resorting to creative interpretation of accounting standards.

For instance, in July 2019, home financier Dewan Housing Finance’s (DHFL) auditors listed several qualifications and disclaimers to the company’s financial statements. One such qualification is that there are significant deficiencies in grant and roll-over of inter-corporate deposits outstanding as on March 31, 2019. The auditors also raised concerns over the ability of the company to continue as a going concern. In November 2019, DHFL became the first NBFC to be referred for bankruptcy by the RBI.

Posing questions about these issues in the AGM gives the management’s perspective too.

Managerial remuneration: The remuneration of directors and key managerial personnel (KMP) section of the annual report offers comparative details on remuneration of top management vis-à-vis other employees of a company. The CEO-to-employee pay ratio is a key ratio to gauge if the top management is paid disproportionately.

For instance, in FY20, Hero MotoCorp’s Chairman, MD & CEO earned 752 times the package of the median employee at his firm. While Shree Cement’s MD and Tech Mahindra’s MD & CEO earned almost 660 times and 618 times (including stock options) the median worker’s pay respectively.

Higher ratio does not immediately indicate that there is a problem. Investors must see if the remuneration is commensurate with growth in profits or operations (performance linked) and is merited by the person’s qualifications. If the answers to this are not convincingly provided in the annual report, questions can be raised about the same in the AGM.

Growth plans: The other important area in the annual report is the management commentary on the growth or capex plans in the director’s report. Reading annual reports over a few years helps investors understand whether the management has the habit of walking the talk. If not, tough questions on this can be raised during the AGM. Hindustan Copper had initially, during FY 2010-11, envisaged increase in mine production capacity from 3.4 million tonne per annum (mtpa) to 12.2 mtpa in a few years. There is hardly any progress on this, but the company announced another ambitious expansion plan from 12.2 mtpa to 20.2 mtpa in the next phase.

Note that the companies are exempted till December 31, 2021, from dispatching physical copies of the financial statements (including Board’s report, auditor’s report etc) , and thus are sent to the registered email ID.

Checklist

Qualifications of KMPs

Remuneration changes

Corporate action rationale

Promises vs performance

Auditor opinions

Documents on demand

AGMs are also an occasion when shareholders can demand to physically examine the register of directors, key managerial personnel and their shareholding in the company and its associate companies, subsidiary companies, though many investors may not be aware of this.

More importantly, the register of contracts and arrangements in which directors are interested — the related party transactions and the director’s interest in it — are also supposed to be made available during the AGM. Normally, these registers are maintained at the registered office of the company. Since AGMs are being conducted virtually now, companies are mandated to provide this information electronically to those who attend the meeting, on request, as per Anandaday Misshra, Founder and Managing Partner at law firm AMLEGALS.

Going through these documents might shed light on the terms and conditions based on which certain arrangements are made. In the case of multinationals, royalty payments to the parent or sourcing arrangements with group companies may reveal interesting insights about the profits available to minority shareholders.

In addition to the above said registers, shareholders are allowed to access other registers such as those maintaining details of members, debenture holders, loans and guarantees given by the company and investments not held in company’s name at the registered office during the business hours.But with movement restrictions and virtual AGMs, the MCA circular seems to be silent about making these documents available online on request.

Published on July 03, 2021

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