Battling the giants: How minority shareholders are making the right noises

When minority shareholders differ strongly with a company’s policies, the practice was for them to pack their bags, sell their shares and exit, as they do not have sufficient voice to be taken seriously. Not any more – they have started to make themselves heard, and influence management decisions, rather than exiting tamely.

For instance, Maruti Suzuki announced in January 2014 that its parent company Suzuki Motor Corporation (SMC) would set up a factory in Gujarat through its wholly owned subsidiary. Shareholders questioned the rationale behind the move: When Maruti could afford to set up the plant on its own, what was the need for SMC to get into the act? Also, if the trend continued, over a period Maruti would end up as just a marketing company, and would no longer be a manufacturer!

The Maruti board was bombarded with letters, and several rounds of meetings were held with shareholders. In the end, Maruti had to rework the proposal as per the negotiations and also agreed to bring it to vote – which was at the time not mandatory under law. The reworked proposal got shareholders’ consent – after 20 months of negotiations.

Read: Maruti gets minority shareholder approval for Gujarat plant

Then there was the case of PTL Enterprise: The management proposed to sell its entire stake in hospitals. The proposal faced strong confrontation from shareholders due to its low valuation. This was the time when Related Party Transactions (RPT) did not require minority shareholders’ approval. KSIDC, a Kerala state government-owned entity and also a 2.3% shareholder in PTL Enterprise, obtained a stay on the proposal. The company had to shelve the plan, and in fact never raised it again. If they do bring it back now, they will have to face more stringent norms put in place by SEBI, and the proposal would have to be voted upon by the shareholders.

In a similar case, In August 2014, the board of Siemens India had planned to sell off its metals technology business to its parent company Siemens AG.

The valuation was lower than the value at which it was earlier transferred to Siemens India, three years ago. Since, the transaction was a RPT, and as per new SEBI norms it had to be tabled for shareholders’ vote and they voted against it.

The management was forced to raise the valuation and a revised resolution was presented again with far greater disclosures, and it finally got shareholders’ nod.

Apart from the critical governance and disclosure issues, shareholders were equally proactive in raising their voice against routine resolutions. In May 2014, Tata Motors approached its shareholders to approve raising the remuneration of three executive directors. The shareholders voted against it, citing lack of sufficient ground as the company was reporting losses on a standalone basis.

However, the resolution got shareholders’ nod when management provided them additional disclosures and justification for the proposal.

Read: Vijay Mallya finds 75 million reasons to resign as USL chairman

In another case, when Diageo took over United Spirits Ltd. (USL), several undisclosed transactions with other UB group companies were discovered, that had resulted in leaking of funds. In November 2014, many resolutions related to these transactions were put to vote, and most of them got rejected by shareholders. Also, when Vijay Mallya was declared a wilful defaulter with respect to Kingfisher Airlines’ debt, the shareholders wanted him to resign as chairperson. The matter was sub-judice for a long time, but he recently stepped down from the position of chairman.

“Engaging with the management plays a vital role, for example in Maruti and Siemens investors have been in dialogue with the company to sort out the issues, and additional disclosures satisfied the shareholders and they gave their approval. But in case where management refuses to address their concerns, shareholders should take legal recourse,” said Amit Tandon, managing director, IiAS (a proxy advisory firm).

Shareholders are also being strongly supported by recent changes in regulations and a tighter corporate governance framework developed by SEBI. The New Companies Act is focused on providing more information to shareholders. It has made it mandatory to obtain approval of minority shareholders in case of related party transactions. E-voting was also made compulsory and the role of independent directors has been emphasised upon to achieving high standards of corporate governance.

Having said that, there are still various challenges ahead for minority shareholders.

“The minority shareholders have started doing their bit, but the institutional investors such as insurers and mutual fund houses should now become proactive and vote aggressively on company policies to make a bigger impact,” said Shriram Subramanian, founder and managing director, Ingovern Research (also a proxy advisory firm).

The shareholders and debtors (banks) should also come together if they feel that management decisions are not in the best interest of company’s future growth, as both sides are losers if something goes wrong.

“There are also too many regulators – Securities and exchange board of India (SEBI), Ministry of corporate affairs (MCA), Company law board (CLB), Serious fraud investigation office (SFIO) and also Economic offences wing of CBI are acting in this space in some or the other way. Investors are unsure when to approach whom.” highlights Tandon. “Prosecution of companies and individuals that undertake corporate misbehaviour takes a lot of time is also a major concern yet to be addressed.” he adds.