Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Boosting shareholder activism in Corporate India

The promoter culture, with deep roots in the lost decades of the licence raj, reigns supreme

A bitter battle been raging in Fortis Healthcare since February this year, when co-founders Malvinder and Shivinder Singh stepped down from the board. Investors have been unhappy about the company accepting the Munjal and Burman families’ takeover bid despite higher bids being on the table. The battle peaked last week when shareholders voted to remove Brian Tempest—an ally of the Singh brothers—from the board with an 88% majority. This has implications for the takeover, of course. But it has broader implications as well: It is a welcome instance of the slow rise of shareholder activism in India.

It is sometimes argued in more egalitarian markets that an excess of such activism can promote immediate shareholder concerns over the long-term vision necessary for a company’s success. That may be true. But the consequences of the lack of activism are depressingly apparent in India. Here, the promoter culture, with deep roots in the lost decades of the licence raj, reigns supreme. It has accreted over the years into opaque corporate control systems. As this paper had noted in the wake of Cyrus Mistry’s ouster from the chairmanship of Tata group (, tangled webs of holding firms, subsidiaries and inter-group investments enable promoter control over listed companies that is disproportionate to their actual shareholding. Unsurprisingly, this has made it easier for investors to sell than urge course correction. That is not a recipe for the trust essential for the smooth functioning of financial markets and efficient capital allocation.

Legislative and regulatory action over the past few years has started to change things for the better. The Companies Act, 2013 has empowered minority shareholders, particularly after the notification of clause 245, enabling class action suits in 2016. The Securities and Exchange Board of India’s regulatory changes in 2014 and 2016, meanwhile, mandated greater transparency regarding institutional investors’ voting decisions. The Insurance Regulatory and Development Authority, and the Pension Fund Regulatory and Development Authority, meanwhile, have pushed their industries to vote on portfolio company resolutions.

There has been a gradual build-up of changes on the ground in response. The year 2017 was something of a high-water mark, with an unprecedented number of instances of shareholders dissenting with the management and board, and, in high- profile cases such as Raymond, getting their way. Institutional investors have also changed tack. Back in 2012-13, fund houses abstained from voting in 52% of the total proposals. In 2015, mutual and pension funds abstained in 24% of the proposals. By last year, this was down to 11%. The changing regulatory environment, meanwhile, has also enabled foreign institutional investors steeped in a more robust culture of activism. It’s no coincidence that UK- and US-based institutional investors called the Fortis general meeting last week.

This is, however, just a beginning. The Companies Act borrows its philosophy from the US’ Sarbanes-Oxley Act, 2002. But the two markets are vastly different. As Sanjeev Aga has pointed out, what may work in the US context of disaggregated shareholding runs up against promoter culture hurdles here. There are other problems as well. Take the role of independent directors. Much of the regulatory action has stressed their importance, such as the recommendations of the Uday Kotak committee. Some good may come out of this. But a note of caution is warranted. Warren Buffett had famously questioned their effectiveness in 2002. The lure of lucrative directorship fees and the quid pro quo networking between promoters, their peers and former bureaucrats means that this is even truer in India, where the independence is often nominal.

The role played by proxy advisory firms can be similarly dualistic. The Companies Act created space for them in the Indian market and they have responded well when it comes to enabling shareholders. But experience in the US and elsewhere shows that they can be problematic as well, with widespread conflicts of interest. Perhaps most importantly, retail investors in India remain hamstrung by asymmetry of information. Given their rapid growth, this must change.

Last year, a Reliance Communications Ltd shareholder meeting saw an extraordinary moment. With the debt-laden company’s woes mounting, Anil Ambani pinned part of the blame on shareholder Shailesh Mehta, who had challenged RCom’s attempt to merge with Sistema Shyam Teleservices in the Bombay high court. Here’s the interesting bit: Mehta held just 10 shares in RCom. That’s the upside of the activism story. Mehta has since stopped investing in shares, owing to the lack of accountability and enforcement of regulations. That’s the downside. Shareholder activism may be gaining ground, but it still has a distance to go.

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