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Photo: Mint

Shareholder democracy is stirring to life in India

The ouster of two bank CEOs by disaffected shareholders suggests a broader awakening among investors. In general, such activism is welcome, so long as it doesn’t go overboard

The country has seen two shareholder rebellions against managements in the span of less than a week, with chief executive officers (CEOs) being voted out. On 25 September, owners of the publicly-held Lakshmi Vilas Bank ousted seven directors, including its managing director and CEO S. Sundar, whose appointment had got regulatory approval in January. The bank was in a financial flap, with its pile of bad debt amounting to over a quarter of its advances by 2019-20-end, and its shareholders apparently took their cue from equity analysts to swipe most of its board out. On Wednesday, Dhanlaxmi Bank’s chief Sunil Gurbaxani faced the same fate, as voters representing an overwhelming majority of its equity denied him re-appointment, an approval that must be obtained annually. This bank was not faring too badly, by the look of its numbers, but dissent over a preferential share issue was reportedly among the factors that went into the loss of confidence in its leadership. Confidence in lenders has generally been low, given the turbulence across this particular sector, but the investor activism now on display suggests an awakening of sorts. Where well advised, it could push India Inc to perform better. Yet, over-zealous ousters could go against the common interests of investors, too.

Indian companies have largely been closely held, with the result that minority owners have had no effective say. Shake-ups at the top were usually done by big corporate players, with the odd involvement of institutional investors. As ownership fanned out, however, even people with slices of widely-owned firms stayed aloof from corporate affairs, content tracking the market value of their stake, ready to go along with all resolutions, and grateful for dividends. The fact that share-of-profit payouts have been relatively meagre in India could perhaps be attributed to that. An early sign that passive investors were stirring out of their slumber came in 2017, when fierce arguments broke out over the pay packet of Infosys’s then CEO Vishal Sikka, an eruption that saw charges hurled around of corporate misgovernance and eventually led to his exit. That episode had an Infy founder playing public advocate, and the actual role of retail investors in its climax may have paled in comparison with that of big stake owners and institutional entities. Still, it marked a new high for Indian shareholder involvement. The US, of course, has had a long history of it, a recent high-profile case being the ejection of Uber’s founder and CEO Travis Kalanick after he ran into a thicket of scandals.

In general, it would be good if managements were under the watch of investors at large, as they have to be pushed to perform and held to account. In a country of frequent corporate scams, the second part is especially important. Thankfully, online voting allows easy participation. Perhaps it is also time to offer voting options beyond the yes/no binary. But shareholder activism can be a double-edged sword. It must be wielded with care. Owners would hurt themselves if they go overboard ousting CEOs on myopic financial concerns at the cost of longer-term strategy. Ideally, as in any democracy, voters should be empowered with information. Ordinary shareholders should demand far more than what they get from anodyne annual or quarterly reports, which are typically exercises of rule-compliance wrapped in a public relations glow. There’s a reason each equity share has a vote attached. India Inc should welcome the emerging urge out there to exercise it.

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