Institutional Investors - Watchdog to Corporate Boards

So far, one of the most positive developments of the Tata-Mistry corporate tussle has been the focus it has drawn on the state of corporate governance in India. The role, powers, functions, duties, obligations and responsibilities of Board of Directors across large and small, public and unlisted companies is now actively being discussed. What is also being reviewed is the true independence of Independent Directors. Valid questions are being asked on whether the last amendments to the Companies Act, 2013, which had incorporated a detailed schedule and code of professional conduct for Independent Directors, had shortcomings. Or are the laws and obligations just ignored!

This feud has also drawn attention to the role of institutional investors in large public corporations. Should these investors be passive and vote along with the management/promoters? Alternatively, are unit holders better served by these institutional investors being more active and questioning the operations and functioning of the businesses they invest in?

Broadly speaking, institutional investors include mutual funds, insurance companies, foreign institutional investors, domestic institutional investors, custodians, banks, development finance institutions and new pension systems. Globally and barring those who actively seek the tag, institutional investors don’t like to become “activists.” Institutional investors expect ethical governance practices. They usually raise concerns around an independent board, solid succession plans, ensuring that shareholder rights are protected and their investments get steady returns.

Of late, even without becoming activists, it is reported that retail and institutional investors in India are actively participating and aggressively voting at shareholder meetings. Signs of this were seen at the recent EGM of Tata Consultancy Services (TCS). Retails investors are believed to have asked tough and uncomfortable questions and were seeking the “real” reasons for Cyrus Mistry’s unceremonious removal. It is common knowledge that, 78% of the votes cast by retail investors were against the resolution to remove Mistry and nearly 43% of the votes cast by institutional investors were also against the resolution. With 44% institutional shareholders abstaining from voting almost 70% non-promoter TCS shareholders voted against the resolution to remove Mistry. The notable abstention was from the Life Insurance Corporation of India (LIC). And in the upcoming EGM’s all eyes will be on LIC given its high shareholding in the Tata group companies. Will LIC once again flex its muscle and bring to fore the enormous corporate power of public sector financial institutions as it did in the hostile takeover bid of Escorts?

LIC and other institutional investors perhaps don’t wish to get involved in the operational issues at Tata. But it should be noted that in a developing corporate governance regime like ours, India Inc. is better served by greater investor participation in the governance process. The Securities and Exchange Board of India (SEBI) took note of the role of mutual funds and asset management companies (AMC) in the corporate governance of listed companies and mandates mutual funds to play an active role in ensuring better governance in investee companies. SEBI stipulates AMC’s to disclose on their websites their general policies and procedures for exercising the voting rights in respect of shares held by them. AMC’s are also required to disclose the actual exercise of their proxy votes in the AGMs/EGMs of the investee companies especially when it relates to the removal of directors or on matters that may affect the interest of the shareholders in general. And in fact, AMC’s are required to record and disclose specific rationale supporting their voting decision (for, against or abstain) with respect to any these matters. It doesn’t end there, boards of AMCs and trustees of mutual funds are to audit that the voting decision is prudent and adequate, given the circumstance at hand and are required to obtain a certificate from an independent scrutiniser. The aim of these mandatory disclosure requirements is to enhance transparency in voting.

While the above stipulations may not be binding on LIC, it would be well advised to also follow these governance norms. Institutional investors on the other hand have to mandatorily comply with the SEBI directive and consequently given the considered approach while exercising votes on shareholder resolutions, abstention from voting is not the best option.

Even for LIC, given the substantial shareholding it holds in the Tata companies which can tip the balance, rather than abstaining it needs to rechristen itself as “Leading Investor Concerns” and vote in the upcoming EGM’s. Of course, voters at EGM’s weigh the probability of success of the resolution being voted at and that affects the decision they make. But the time has come to move away from being passive to becoming active. Watershed moments like these don’t come very often in the history of a nation. As proclaimed, “big owners should act like big owners.” The time is now ripe for institutional investors in India to play an important role in deciding the future of Indian companies. Only then will the votes in the upcoming EGM’s be truly considered as being the vote of your conscience!

Satvik Varma is a corporate commercial lawyer in New Delhi. A graduate of Harvard Law School, he’s worked on Wall Street and is enrolled in India and New York.