Corporate File

The rise of the minority shareholders

| Updated on October 10, 2021

Investor activism is providing the much-needed checks and balances in how companies are run

In November 2011, chocolate maker Cadbury (now Mondelez) passed a special resolution for the reduction of share capital by squeezing out minority shareholders at ₹1,360 per share. However, the minority shareholders demanded ₹3,000 per share. They argued that their objections were not heard at the extraordinary general meeting (EGM) as only 79 of the 800-odd non-promoters were present. The matter went to Bombay High Court, which set the buy-out price at ₹2,014, leaving the minority shareholders disappointed.

Investor activism

Cut to 2020, when an attempt by the promoters of Vedanta to delist the company was defeated by minority shareholders. The Anil Agarwal-led promoter group offered ₹87.25 a share for the 40 per cent stake held by public shareholders. Minority shareholders demanded ₹236-320, forcing the promoters to call it off.

From rejecting salary hikes for managing directors to striking down promoters’ plans to sell stakes, minority shareholders are finally having a say in how companies are run.

Take the case of the ongoing battle between the promoters of Zee group and US-based investor Invesco. On September 11, Invesco wrote to Zee, seeking an EGM of shareholders of Zee Entertainment to oust the company board, including the CEO Punit Goenka, citing poor corporate governance. The very next day Goenka announced a merger with Sony Pictures. But the far-from-pacified investor wants Goenka to be held accountable and continues to insist on holding an EGM.

In New Delhi, Eicher Motors’ promoter Siddhartha Lal learnt the hard way when shareholders rejected a proposal to reappoint him as managing director and increase his salary by 10 per cent in a pandemic-hit year. At ₹23.23 crore, Lal’s proposed salary for the current financial year would have outstripped those of other MDs in the sector.

Observers say the sudden rise in investor activism is largely driven by a conducive regulatory framework (Companies Act 2013 and SEBI regulations) and probably a more mature investor community.

“While investor activism may lead to short-term value depletion, it would bring in accountability, good corporate governance and build shareholder value in the long term,” said Praveen Raju, Partner, Spice Route Legal, adding, “It is but natural for controlling management to stake their claim to run corporations in the manner they think best, but such checks and balances are necessary to ensure that they are watchful of their actions.”

Minority rights

Vinit Bolinjkar, Head of Research, Ventura Securities, said it is high time that companies start recognising the rights of minority shareholders. The rights of minority shareholders need to be protected by independent directors but the problem currently is that many of them act on behalf of the promoters.

Deepak Sanchety, Ex-Head of Surveillance, SEBI, said even the funds and large institutional investors rarely spoke against promoters in the past. Even market regulator SEBI’s record has been nothing to write home about in the areas of open offers and corporate restructuring.

“Minority shareholders taking lead on corporate governance is certainly a welcome change and the market as a whole will tremendously benefit from this,” said Sanchety.

Proxy advisory firms have been at the forefront of leading this change in many cases. Both in the case of Zee and Eicher, proxy firms had asked minority shareholders to vote against the promoter group.

Shriram Subramanian, founder of proxy advisory firm InGovern Research, says, “It is important for companies and investors to engage positively.” Due to the activism, companies will be careful not to indulge in any shenanigans — financial or otherwise, he adds.

Published on October 10, 2021

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