Investor activism is rare in India. The challenge thrown by the London-based The Children’s Investment Fund (TCI) to the Indian government is thus important.
TCI is using the provisions of a bilateral treaty between India and the UK to threaten legal action against the Indian government because it could have short-changed other investors in Coal India, the world’s largest coal miner which is controlled by New Delhi. In an interview to ET Now, a television channel, TCI’s Chris Hohn has alleged that government policies that force the miner to sell its coal at below market prices lead to a profit reduction of $20 billion a year. Hohn has also said that the independent directors in Coal India could be threatened with personal liability because they have failed to “execute their fiduciary duty to represent all shareholders and not allow abuse of minority shareholders”.
The battle deserves close attention. Corporate governance reforms in India have traditionally focused heavily on independent boards that would keep a close eye on company managements. The record here has been mixed, at best, while there have been cases such as Satyam and Kingfisher Airlines when independent directors have done precious little to stem the problems in these companies. (Read this opinion piece by Shriram Subramanian, managing director of corporate governance firm InGovern Research Services, on what various stakeholders can do to save Kingfisher Airlines ).
The failure of boards to act independently means that investor activism becomes even more important to protect the rights of minority shareholders. The Akzo Nobel case is also interesting. Minority shareholders opposed a move to merge three unlisted companies with it, arguing that it did not protect their interests. The merger plan got through, but not before there was a stiff battle for votes. That the opposition was led by domestic mutual funds and insurance companies is heartening, since a look at the voting record on domestic institutions during company meetings shows that it is dominated by abstentions.
To be sure, the Satyam management had come under fire from fund managers and analysts during the conference call when the controversial proposal to buy out Maytas Properties as well as a 51% share in Maytas Infrastructure, for $1.6 billion, was discussed, a few days before Ramalinga Raju admitted to fraud.
The Coal India case is special because it involves a public sector company, a situation that means the government is both policy maker and majority owner. The conflict of interest between these two roles is particularly harmful for minority shareholders, something that TCI is now making a hue and cry about. Cases such as Coal India and Akzo Nobel could prove to be important milestones in the long battle for better corporate governance.