We are seeing increased activity by shareholders in corporate India. Resolutions which seems prejudicial to the interest of the public or institutional shareholders or on aspects of governance, are being defeated. An IIAS study shows that 75 resolutions have been defeated in the past four years, whereas traditionally, resolutions would be passed without question. It is also interesting to see that the resolutions voted out are typically on board appointment/reappointments (including managing directors) and related-party transactions.
The new Companies Act has empowered non-promoter shareholders significantly by giving them the ability to vote out resolutions in specific areas such as related parties, under the majority of the minority requirements for voting to pass resolutions.
The next thing that we can expect to see is active activism. It means shareholders start proposing resolutions themselves rather than reacting to proposed resolutions. It just needs 10% shareholding to propose a resolution in an AGM or EGM and shareholders are expected to exercise these actively. Some areas that shareholders could consider developing and proposing resolutions are:
Capital structure related
■ Return cash to shareholders: Demand return of excess cash in companies via a special dividend or share buyback
■ Restructure debt: Suggest changes to debt structures (currency, period, interest rate, repayment cycle, etc.)
■ Valuation: Oppose value at which a deal is proposed and demand renegotiation of the value/terms of the deal
■ Structure: Propose a different structure for the transaction
■ Spin off business to unlock value
■ Divest assets or holding
■Seek sale or merger with another company
■ Suggest entry into specific businesses
■ Demand exit from specific products
■ Demand resignation of specific board members, or managing director, or chairman
■ Propose specific names for addition to the board
■ Demand change of auditors or other service providers
■ Demand change to remuneration of directors, MDs, etc.
■ Demand change in pricing strategy of the company
There are a number of areas that one could now study and identify changes required to enhance value of the company or improve its governance. However, it is important for those making such proposals to back it up with detailed rationale and analysis.
Such campaigns are led by institutional investors typically called activists and we are likely to see the arrival of many of these into the Indian market. Globally, this is a huge asset class. In 2017, activists deployed $62 billion in campaigns, double that of 2016. They secured 100 board seats, forced changes to directors and CEOs, changed pricing mechanisms, etc. Those challenged, included large corporations such as Nestle, Samsung. We can expect to see activist funds in the Indian market very soon. India Inc. needs to prepare for dealing with this. Here are some quick steps that India Inc can take:
■ Develop an in-house team which thinks like an activist and challenge the status quo internally.
■Form a core team of advisors (lawyers, i-bankers, PR firms) who are engaged with the firm
■ Regularly do fire drills of how and who will react and when. Educate all key management personnel and board members to be prepared.
Finally, it is not necessary that the company resists all proposals from activists. Many proposals will be good and needs to be examined with an open mind, and it would make sense to accept those which make sense dispassionately.
Harish H.V. was part of the Leadership Team of Grant Thornton.