Funds Learn to Say No as Boardrooms Challenged: Corporate India

Money managers in India’s $1.7 trillion stock market are no longer giving rubber-stamp approval to the nation’s corporate boards.

Local mutual funds voted to reject 6.6 percent of the proposals presented to shareholders in the nine months ended December, up more than fourfold from the year to March 2013, India’s securities regulator said in an e-mailed response to questions from Bloomberg News. Their participation rate in shareholder votes jumped to 83 percent from 49 percent, spurred by new disclosure rules that require fund managers to provide a rationale for their decisions to investors.

The more assertive stance from minority shareholders prompted United Spirits Ltd. to modify plans to loan money to companies run by its former chairman and led Maruti Suzuki India Ltd. to put on hold a proposal to transfer a new factory to its parent. While India still lacks the type of activist investing personified by U.S. billionaire Carl Icahn, funds’ growing willingness to challenge management may help improve governance in a nation ranked 94th out of 144 countries for the efficacy of its corporate boards by the World Economic Forum.

“This trend will enable a manager like ourselves to invest in more Indian corporates,” Jonathan Schiessl, the head of equities at Channel Islands-based Ashburton Investments Ltd., which oversees $12 billion, said in an e-mail.

India’s benchmark S&P BSE Sensex has climbed 40 percent in the past year. The gauge briefly climbed above the 30,000 mark for the first time on Wednesday after the central bank reduced interest rates in an unscheduled decision. The index fell 0.1 to 29,346.3 at 11:50 a.m. in Mumbai today.

Voting Decisions

Overseas investors have bought a net $4.6 billion of domestic shares this year, following $16.1 billion of inflows in 2014. Local funds purchased $5.6 billion of equities in the nine months through January, data compiled by Bloomberg show.

In March 2014, the Securities and Exchange Board of India made it compulsory for funds to provide a rationale for their voting decisions on proposals linked to mergers, takeovers, change in capital structure and appointment of directors. The disclosures must be made quarterly and certified by an auditor.

The rules “emboldened funds to vote against resolutions that weren’t in the interest of minority shareholders,” SEBI spokesman Bhagwandas Samariya said by e-mail on Feb. 26.

Maruti Suzuki India Ltd. ran into shareholder opposition last year on its plan to build a 50 billion-yen ($418 million) plant in the western Gujarat state that would be fully owned by its parent Suzuki Motor Corp. A group of 16 institutional investors called the plan a “blatantly wrong and value-eroding oppressive transaction” in a March 2014 letter to the company.

‘Changed Mindset’

That prompted Maruti to announce two weeks later that it would seek minority shareholders’ approval. The company has yet to seek a vote on the proposal.

In November, stockholders voted against nine of 12 proposals from United Spirits, including plans to give loans to and do other deals with companies linked to its previous owner, liquor tycoon Vijay Mallya. The company revised the proposal, saying the agreements will be with subsidiaries of Diageo Plc., its holding company. Shareholders approved the plan on Jan. 9.

“The mindset has changed, the dialogue with managements has changed,” Amit Tandon, founder of Institutional Investor Advisory Services, a proxy-advisory firm, said by phone from Mumbai.

Shareholder activism in India still lacks the firepower of that seen in the U.S., where investors like Icahn, chairman of Icahn Enterprises LP, routinely campaign against company managements they judge to be performing inadequately.

Consequences

In February last year, Icahn dropped his campaign to spur Apple Inc. to buy back $50 billion of stock after iPhone-maker stepped up repurchases. Apple’s chief executive officer Tim Cook last month appeased him by telling an investor conference “we’re not hoarders,” and the company wanted to give whatever cash it doesn’t need back to shareholders.

F. William McNabb, chief executive officer of Vanguard Group Inc., in a Feb. 27 letter to 500 of the fund’s largest holdings laid out the corporate governance principles his firm wants to see followed. Nabb’s letter puts on paper some of the same ideas that BlackRock Inc., the world’s top money manager, set down last month in its latest guidelines for proxy voting, such as shareholder responsiveness and independent oversight.

Icahn-style activism “is still some way off” in India, said Tandon. Most company founders own large stakes, giving them greater sway over corporate decisions, he said.

Founders own majority stakes in 62 percent of companies in the S&P BSE India 500 Index, data compiled by Bloomberg show.

An increase in the money managed by mutual funds is giving them more power to reject proposals, according to Sundeep Sikka, chairman of the Association of Mutual Funds in India, an industry body. Assets under management climbed 26 percent to a record 11.1 trillion rupees ($178 billion) last year.

“Increasingly, Indian companies understand they can’t speed ahead with contentious issues,” said Sikka, who is also chief executive at Reliance Capital Asset Management, which runs India’s third-biggest mutual fund. “If they do, it will lead to situations which are not so pleasant.”

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