role of institutional investors and proxy advisory … of...1 role of institutional investors and...
TRANSCRIPT
1
Role of Institutional Investors and Proxy Advisory Firms
Bangalore, August 22, 2013
Shriram SubramanianINGOVERN RESEARCH SERVICES PVT. LTD.
PRESENTED TO INDIAN ASSOCIATION OF INVESTMENT PROFESSIONALS
Indian Markets Overview
2
Exchanges No. Listed Actively Traded
Indices Mkt. Cap
National Stock Exchange
~1,400 companies
~900 •Nifty 50•Junior Nifty 50•S&P CNX 500
~USD 1.0 trillion
Bombay Stock Exchange
~5,000 companies
~1,000 •Sensex 30•BSE 500
~USD 1.0 trillion
Type Number Investments*
Foreign InstitutionalInvestors (FIIs)
1,740 $ 119 billion
Mutual Fund Families
44 $ 139 billionPromoters
52%
FIIs24%
Mutual Funds/
Insurance11%
Retail8%
Others5%
Ownership Structure
* includes Fixed Income
Institutional Shareholders – Perception or Reality?
3
Voting Patterns of Mutual Funds in India
4
Indian mutual funds are still largely passive and/or indifferent while
voting at investee company shareholder meetings
Routine CG matters still ignored by Investors;
Funds abstained from voting for 51.5% of the resolutions in 2012-13
Only 431 out of 28,290 resolutions (~1.5% of total resolutions) disclosed by mutual funds have been voted AGAINST in 2012-13
Two mutual funds completely abstained from any voting in 2012-13 and are not compliant with SEBI disclosure norms, while some funds have
disclosed voting data incorrectly
Source: Mutual Fund Voting Patterns 2013 Report published by InGovern Research Services in August 2013
Voting Infrastructural Hassles
eVoting is mandatory* for postal ballots
– Not much change in votes cast by MFs on postal ballots
Show of Hands
– Franklin Templeton reports voting Against appointment of director at Idea; yet Idea discloses that the director was appointed unanimously
– Who is reporting wrongly?
Institutional investors should canvass/demand eVoting for all shareholder meetings
– With regulators
– With companies
5
* For 500 companies, but most companies have adopted it
Key Issues with Role of Institutional Investors
6
Disclosure of Governance/Voting Policies and Voting Records
Disclosure of material Conflicts of Interests which may affect exercise of ownership rights
Institutional investors are becoming Short-Term Investors
7
Mutual funds to report how they vote from FY2010-11
Need to show activism to appeal to newer long-termfund sources: foreign investors, EPFO, insurancecompanies.
Domestic Mutual Funds
ADR/GDR holders given right to vote
Need say in corporate governance issues in India
Voting Disclosure by companies immediately aftermeetings – promoter, institutional, non-institutional
Companies Bill 2012 (passed by Parliament) explicitlyprovides for e-voting for shareholder resolutions
Public holding in listed companies > 25%
Foreign Institutional Investors (FIIs)
Other Developments
Developments Enabling Institutional Activism
Hindering Activism
Hostile Takeovers
Benign Lenders
Legal Hassles
Regulatory Enforcement
8
Role of Proxy Advisory Firms
9
Independent Directors
Minority Shareholders
RegulatorsInstitutional Investors
Proxy Advisory
Firms
InGovern – India’s 1st Proxy Advisor
Corporate Governance Research
“Governance Radar” Proprietary Framework
10
Vote Recommendations
AGMs, EGMs, Postal Ballots, Court-convened meetings
Risk Monitoring Service
Financial, accounting and legal issues with companies
Proxy Voting Service
Execution of votes at shareholder meetings
Pioneer Proxy Advisory company in India since 2010
Assists institutional investors that have financial or reputational exposure to public cos.
Criteria in “Governance Radar”
•Appointments, Compensation, Meetings, Remuneration, Responsibilities, Chairperson, Code of Conduct, Company Secretary, Independent Directors etc.
Board
•Audit, Nomination, Shareholders, Risk, Remuneration Committee Composition, Meetings, Powers, Responsibilities
Board Committees
•Code of Conduct, Remuneration Policies, Risk Management, Whistleblower Policies
Management & Operations
•Audit & Accounts, Auditor Independence, Ethical Standards for AuditAudit & Accounts
•Related Party Transactions, Shareholders Meetings & Voting, Other RightsShareholders
Rights
•Audit & Accounts, Board Appointments, Composition, Remuneration, Meetings), Board Committees, Independent Directors, Management & Operations, Ownership, Shareholder Meetings, Whistle Blower Policies
Disclosures
11
Approximately 400 criteria evolved
12
Case Studies
Board and Governance Structure in India
13
10% of companies have board sizes of either more than 16 directors or less than 7 directors
9% of companies were non compliant with Clause 49; with <50% IDs and no Independent Chairman
One in Five Directors attend less than 75% of Board Meetings
9% of Independent Directors have outside directorships in more than 10 public companies
22% of IDs have served on the Board for more than 9 years
Only 45 companies had Audit Committees comprising only of IDs
13 companies have not constituted a Remuneration Committee
53 companies have had the same Auditors for >5 years
Source: India Proxy Season 2012 Analysis Report published by InGovern Research Services in November 2012
Cases
Colgate, Wyeth, P&G
– Mr. R. A. Shah is ID and Chairman of Audit Committee
– Similar cases with many MNCs
Ingersoll Rand has only 3 Directors
Related Party
– Madras Cements contributes to Engineering College
– KSB Pumps – sole selling agent at 12% commission
Compensation
– HCC almost doubled CMDs compensation when in CDR!!
14
Case Study: Akzo Nobel India Limited
15
• CCM – Amalgamation of 3 unlisted promoter heldentities with the listed entity
• Issue – Unfair valuation of promoter held unlistedentities resulting in minority shareholder dilution
• Votes AGAINST - 23.11%; Resolution wouldn’t havepassed if 2 key institutional investors had notabstained
InGovern recommended voting AGAINST the amalgamation
Case Study: Escorts Limited
16
• CCM – 100% subsidiary sold to a trust controlled by promoters
• Issue – Complicated cross holdings between these group entities; Merger resulting in issue of treasury shares; Unfair scheme with increase in promoter stake by ~10%
InGovern recommended voting AGAINST the restructuring
Case Study: Pantaloon Retail (India) Limited
17
• CCM - Transfer of Fashion division and restructuring
• Issue – Dilution of direct voting rights of public shareholders ofPRIL and FVIL in FLFL; Same share exchange consideration forboth Equity and DVR Shareholders; Disclosures and transparencyissues
• Promoter DVR holding increased from 46.57% to 51.45% aftervoting rights on DVRs increased from 1/10th to 3/4th
• Promoters hold 51.45% in DVRs and only 43.66% in Equity Shares –Same swap ratio used
Investor group hits out at Pantaloon Retail’s demerger overdilution of voting rights
InGovern recommended voting AGAINST the restructuring
Proxy advisory firm opposes Pantaloon Retail restructuring
Vote against Pantaloon’s fashion biz demerger: InGovern
Case Study: Ambuja Cements Limited
18
• Amalgamate Holcim India with Ambuja Cements with Ambuja ending up owning ACC
• Economic interest in ACC given up without giving upControl. Cash outflow of Rs. 3,500 crores amounting to aselective buyback.
• Votes – Resolution yet to be put to vote for shareholderapproval. SEBI reviewing the Scheme post opposition of thescheme by InGovern
Sebi looking at minority interest in Holcim-Ambuja Cementsdeal
Could be a landmark – Holcim doesn’t get Voting and Majority of Minority need to Vote FOR
Analysts see raw deal for Ambuja Cements’ small investors
Rude shock for Ambuja minority shareholders
19
Questions?
Thank YouShriram Subramanian
InGovern Research Services Pvt. Ltd.