Non performing directors face minority shareholder ire

Mumbai: Puneet Bhatia co-managing partner and India head of private equity major TPG Capital Asia was in for a shock on 19 August when the minority investors of Shriram Transport Finance (STFC) voted him out of the board. A rare occurrence when mostly minority investors use AGMs to vent out without making waves, or affecting any changes. This incident has kickstarted a trend of minority investors scrutinizing key appointments.

They are becoming increasingly vocal about their preferences often holding directors of India Inc accountable for their performance or the lack of it. Apart from STFC, in the recent months have seen investors examining re-appointment of key directors at Eveready Industries and Suzlon Energy basis concerns raised by proxy advisory firms Institutional Investor Advisory Services (IIAS) and Stakeholder Empowerment Services (SES). “The concern is whether directors should be allowed to continue on boards when they failed to turn around the company, gave unnecessary high inter-corporate loans to group firms, did not participate in key meetings of the boards,” said a fund manager, the fund is a key domestic institutional investor.

Both the proxy advisory firms –IIAS and SES have recommended to the shareholders of Suzlon to recommend against the re-appointment of company founders and promoters Tulsi Tanti and Vinod Tanti's appointment as directors. Tulsi Tanti is currently the chairman and managing director at Suzlon and Vinod Tanti is executive director and COO in the company.

IIAS has cited poor performance of the company over an extended period of time as the reason. “Given the poor performance of the company over an extended period and the inability of the current management team, to turn around the company, we do not support the continuation of the existing promoters on the board. We believe the board must professionalize the management and having the promoters on the board may impede the directors’ ability to take hard decisions,” said IIAS.

SES in its report concurs, being they are promoters responsible for the present financials crash and operational declined of the Company.

“The Company had defaulted in payment of dues to its lenders and incurring continuous losses, which led to erosion of net worth of the Company, SES holds him responsible for financial mess that the Company is in, at present. SES is of the view that the MD of a company must lead the way in austerity measures, at least at the present juncture, after almost threatening the existence of the Company,” said SES in the report.

In the case of Eveready, the governance firms have recommended to shareholders to not vote for Aditya Khaitan's re-appointment. He as promoter and non-executive chairperson of the company did not provide sufficient oversight on the firm’s workings or set the governance standards, the governance firms said.

The governance concerns stem from the inter-corporate deposits (ICDs) given to promoter group companies, which have been flagged by both the statutory auditor and Securities and Exchange Board of India (Sebi).

According to a Sebi letter issued to the company to 4 September, about 1/3rd of company's turnover is stuck in ICDs, corporate guarantees and post-dated cheques given to promoter group companies.

The company since 2018 has neither asked for repayment or interest so an amount of ₹553 crore is outstanding with promoter group company, said Sebi.

“As on 31 March 2020 these amounted to 99.6% of the consolidated networth. Further, the statutory auditors have issued a disclaimer of opinion since they were unable to obtain sufficient audit evidence regarding the extent of impairment of ICDs and potential liability towards corporate guarantees,” said IIAS in the report.

These two company resolutions which are being voted on starting today will be key to watch out for as in recent times two company boards have seen shareholder activism over board appointments.

Majority of the shareholders of STFC last month had voted against Puneet Bhatia, co-managing Partner for TPG Capital Asia and the head of TPG Capital India, to act as a director in the company, as he did not attend half of the company's board meetings last year.

Sandra Shroff vice chairman of UPL had resigned from the board on 31 August just before the annual general meeting as proxy advisory firms recommended against her reappointment as non-executive director. The reason being excessive remuneration paid to her through subsidiaries or group companies.