Articles

Shareholders in India are Finding their Voice

Rakhi Kumar, Senior Research Analyst, Proxy Governance Inc*., Washington DC

If shareholder activism is to take hold in India the Government as well as listed companies
ought to strengthen the shareholder rights by reforming the voting process at AGMs.
e-mail : Increased shareholder activism and improvements in proxy voting process will create
rakhi.kumar@aya.yale.edu
the need for increased dialogue between institutional investors and companies.

WHY THE CHANGING FACE OF INDIA’S
MINORITY SHAREHOLDERS IS GOOD NEWS
FOR CORPORATE GOVERNANCE IN INDIA BUT
FURTHER PROXY VOTING REFORMS ARE
NEEDED
A country’s corporate governance framework hinges on the
support of three key groups – the government, board of directors
(BoDs) and managers of companies, and shareholders,
particularly institutional investors (see Figure 1). Together, these
groups provide the check and balances needed to help strengthen
corporate governance in a country and are the pillars that provide
a strong foundation to a country’s governance framework.
The role of the institutional investors becomes even more
important in countries, like India, where a majority of the
listed companies are controlled by the promoters or a family.
In such companies, the largest shareholder often controls the
management and the BoDs, increasing the likelihood of actions
that may not be in the interest of all shareholders. For years,
corporate governance experts have been surprised by the lack
of investor involvement in India’s corporate governance
process, particularly given the country’s rich history of equity
markets that dates back to the 1850s. In its 2006 report,
“Corporate Governance in India: An Investor Perspective”,
the Institute of International Finance identified the lack of
shareholder activism as one of the key weaknesses in the
country’s corporate governance framework. Without
shareholder involvement, the country’s corporate governance
framework is missing a pillar, which weakens the structure in
the long-term (see Figure 2).
A US-based proxy advisory service.
The 2009 Satyam scandal (where the founder-chairman, who
controlled less than nine percent of shares of one of India’s
largest information technology services companies, perpetuated
a financial fraud worth USD 1.5 billion) was unearthed due
to the overwhelming opposition by foreign institutional
investors (FIIs) to a related-party deal that the company was
proposing to undertake to hide its financial wrongdoings.
Therefore, while the Satyam scandal caused some
embarrassment to corporations in India, or India Inc. as it is
called colloquially, it also underlined the importance of
institutional investor participation in the capital market
development of the country.
Regulators have begun to realize that institutional investors,
who have greater financial and human capital available to
make better informed investment decisions, can play an
important role in identifying potential governance problem
in listed companies. Moreover, their buying and selling
decisions are often a signal to the market on the prospects of
a company. This indirectly helps protect the interests all
minority investors while reducing the burden on the
government and regulators, who currently are the sole
guardians of investor rights in India.
Figure 1: Three Pillars of a Country’s Corporate
Governance Framework
Government
 Establishes the corporate governance framework in a country
through its laws, rules and regulations.
 Enforces laws, rules and regulations.

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 Articles
Shareholders in India are Finding Their Voice
their shares resulting in almost no shareholder activism in the
country. Those retail investors that made some ‘noise’ at
shareholder meetings were often seeking higher dividends or
Institutional Investors Board of Directors/Managers
were thought to be greenmailing1 companies. Their behavior
 Complements government  Establishes overall governance influenced India’s laws that govern shareholder rights, which
oversight of laws, rules practices at the company level. are designed to protect minority shareholder but stop short of
and regulation – especially  First line of defense providing
fully empowering shareholder. However, the face of the
important in countries oversight of company’s
with perceived weaknesses activities and ensuring
minority shareholder has been silently changing over the last
in enforcement structures. effectiveness of internal controls. decade with the growing rise of an institutional investor base
in India.
 Enhances protection of
minority shareholder Inflows by FIIs have been growing steadily since 1993
interests. (see Figure 3). FIIs are estimated to own about 16% of
Indian equities (worth US$147bn) and account for 10-
15% of the equity volumes 2 . Given the positive market
Figure 2: Analysis of India’s Corporate Governance
sentiment on India’s long-term economic growth, these
Framework
numbers are expected to increase significantly over the
coming years. Further, with the growth of the mutual fund
Government industry in India, equity inflows from Indian households
 Enforcement system weakened by a fragmented oversight structure. are also on the rise. Domestic (household) investments in
equity markets are expected to grow from less than US$
 Limited human resources with adequate knowledge and skill
impacts quality of oversight. 10 billion in 2005 to about US$ 100 billion in 2020 (See
Figure 4).
 Receives feedback from company associations but limited inputs
from shareholders on proposed reforms.
Figure 3: Foreign Institutional Investor Inflows into
India
FII inflows
Institutional Investors Board of Directors/Managers
 Limited engagement in  Majority of listed companies
corporate governance process. managed by a controlling
 Current market practice with shareholder or family.
regard to shareholder voting  Limited culture of engaging
process disadvantages minority investors in dialogue on key
shareholders. governance issues such as
 Limited input in reform process; compensation, director
no advocacy mechanism. appointments, mergers and
acquisitions etc.
 Strong voice in reform process
through advocacy groups such
as CII and FICCI.

The Growth of Institutional Investor Base in India

Heralds a New Dawn for Corporate Governance in
the Country
Historically, India has had a large retail base of domestic
1. The practice of buying enough of a company’s stock to threaten a hostile
investors, who are often unaware of their rights as owners of takeover and reselling it to the company at a price above market value.
the company and have a limited understanding of corporate (Source: Merriam Webster dictionary)
governance. As a result, minority shareholders have not voted 2. http://www.investindia.kotak.com/knowledge-centre/fii-interest-india.html

CHARTERED SECRETARY 1726 DECEMBER 2010 (A-520)

Articles
Shareholders in India are Finding Their Voice
Figure 4: Projected Equity Inflows from Indian
Households
Equity inflow from Indian households
As highlighted above, this quiet change is already having a
significant impact on corporate governance in the country.
Many FIIs consider corporate governance as a criterion in
their investment decision-making process. They tend to be
more active shareholders than their domestic counterparts
especially in emerging market countries, and often are required
to vote their shares by their regulators. More recently, even
the Securities and Exchange Board of India (SEBI), via a
March 15, 2010 circular, has advised the Asset Management
Companies to make general policy for proxy voting and
exercise the voting rights in respect of shares held by the
Mutual Funds in the listed companies to play an active role in
ensuring better corporate governance of listed companies.
However, in India, proxy voting reforms are needed to ensure
that these votes are counted.
Reforming the Voting Process is Key for Future
Development of Corporate Governance in India
It is argued that shareholder in India have the right to vote
against management proposals at annual general meetings, which
should suffice as a mechanism through which shareholders can
voice their dissent. However, an outdated and complicated
shareholder voting process in most Indian companies makes it
difficult for institutional investors to exercise their rights and
engage in the corporate governance reform process altogether.
In its January 2010 White Paper on Corporate Governance in
India3 (ACGA report), the Asian Corporate Governance
Association described the shareholder meeting and voting process
in India as ‘antiquated’. This study, which was undertaken by
leading FIIs such as CalPERS, Hermes Fund Mangers, Franklin
Templeton Investments and Fidelity International, identified
3. http://www.acga-asia.org/public/files/ACGA_India_White_Paper_
Final_Jan19_2010.pdf
(A-521) DECEMBER 2010 1727
the following concerns with the voting process:
 Voting by ‘show of hands’ rather than ‘voting by polls’
disenfranchises investors. Most Indian companies still count
vote by ‘show of hands’ or ‘acclamation’ (where the
chairman calls for shareholders to show their support or
opposition), or ‘assent’ (where chairman asks if everyone
agrees) at shareholder meetings. Voting under these
systems disenfranchises investors because each person at
the meeting gets one vote per resolution irrespective of
number of shares held by them. It replaces the one-share-
one-vote principle with a one-person-one-vote principle.
 Proxies (persons representing shareholders who cannot
attend in-person) are not allowed to speak at the
shareholders meeting or vote on show of hands. Since
most FIIs cannot attend shareholder meetings due to
the geographic distance, they assign proxies to vote
shares on their behalf. In general, proxies can only
vote in a poll and since polls are rarely called at AGMs
in India 4 , it means that proxy votes cast by FIIs are
rarely counted5 . As a result, proxy votes cast by foreign
and domestic institutional investors and other
shareholders who cannot attend meetings are often not
counted.
 Quality of information provided by listed companies was
often insufficient for investors to make informed voting
decisions. For example, detailed meeting circulars and
annual reports were often not ready in time for foreign
investors to cast their votes. Agendas also lacked key
details on resolutions. Very few companies made these
documents available on their website or on the websites
of the stock exchanges on which they were listed.
If shareholder activism is to take hold in India, the government
and Indian listed-companies need to strengthen shareholder
rights by reforming the voting process at annual general
meetings. While the Indian government has proposed
significant reforms to the Companies Act of 1956, the draft
Companies Bill does not fully address some of the issues raised
above. Until voting by ballot becomes the norm at all
shareholder meetings, institutional investors will have limited
impact on corporate governance in the country.
4. The Companies Act states that voting is always by a show of hands unless
a poll is demanded.
5. According to the report “ACGA’s White Paper on Corporate Governance
in India”, in theory it is not too difficult for a proxy, or group of proxies, to
call for a poll in India. According to Section 179 of the Companies Act,
“any member or members present in person or by proxy” may call for a poll
if they hold shares in the company giving them not less than 10% of “total
voting power” or on which the aggregate sum of not less than Rs50,000
(US$1,054) has been paid up. While the first criteria could present some
problems, the latter is not onerous. However, in practice, polls are not
called so the proxy votes are not counted. In general polls are viewed as
“unnecessary and impractical” by listed companies in India.
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Implications for Company Secretaries
Increased shareholder activism and improvements in the
proxy voting process will create the need for increased
dialogue between institutional investors and companies. More
vocal investors will help improve market transparency, reduce
cost of capital for Indian companies, and strengthen foreign
investor confidence in India’s equity markets. However, this
will change the way companies and investors interact, which
will have direct implication for company secretaries, who
are responsible for supervising the corporate governance in
a company, primarily through the compliance function.
Company secretaries should prepare for the coming changes by
establishing mechanisms that facilitate shareholder engagement.
In more developed markets, this includes: i) quarterly earning
CSR should be CBR – Corporate Basic Responsibility
(Contd. from p. 1724)
Respect for Workers’ Rights and Welfare
One of the main causes of industrial strife over the
years has been the neglect or ill treatment of workers by
the company. It may seem to be a paradox that on the one hand
a company needs to engage workers to carry on its business,
while on the other hand it may not really care for its workers.
The Corporate sector is replete with examples of companies
who courted disaster by neglecting their own workforce. It
needs to be remembered that no company can be really
successful if its own workforce comprises of unhappy people.
It is not enough for a corporate to comply with the labour
laws and provide all the statutory benefits that would make
the company only legally compliant. If a corporate wants to
carve out a future for itself and wants to really become a
success, it has to treat its workers as its partners in the venture,
after all they are also staking their future with the company.
Here one need not go far, the case of the TATA group
exemplifies this. The Tata history indicates that the Tata’s
brought in several labour welfare measures much before they
were introduced by the statute. The recent example of the Taj
Hotel which met with disaster on 26th November 2008 is a
shining example as to how the Tata’s went all out to help their
employees and took care of all the aspects of the affected
workers. In fact, the Tata’s wents further and even helped
those victims who were not Tata employees.
It hardly needs stressing that if the promoters bring
entrepreneurship and capital to the table, it is the workers
who take the burden and together the company is able to
achieve success. Hence, it is becoming evident that taking care
of labour is not only socially correct thing to do, but is a
necessity which a company can ill afford to ignore.
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Articles
Shareholders in India are Finding Their Voice
calls with investors and analysts; ii) direct dialogue with large
institutional investors; and iii) proxy voting and voting by ballots.
While investors relations teams help facilitate the dialogue,
company secretaries will have to play a significant role in
managing the message, and ensuring that senior executives and
the company’s directors are made aware of their duties and
liabilities to shareholders. For example, a company secretary
will need to ensure that no insider information is passed along
on investor calls, and if such information is provided, it be
made available to the market in a timely manner.
Increased shareholder activism is the next chapter in India’s
capital market development process, and it is important that
company secretaries help prepare their companies for this new
era in shareholder engagement. 
Respect for Environment
Can a country where the corporate sector keeps on destroying
the environment just to generate profits become a great
country? Nay, such a behavior would even threaten the very
ecological balance of the country and thereby inviting disaster.
Consequently, can respect for environment be treated merely
as a social obligation or responsibility of a company or should
it be one of the fundamental pillars on which the business of a
company is based, particularly when the business would result
in damage to environment. Once it becomes a basic requirement
for a company, the business should not proceed unless due
care is taken to avoid ecological disaster or undue loss to the
environment or measures have been initiated for finding
alternative methods to reduce the likely damage that would be
caused by the company’s business.
Conclusion
In conclusion, it can be said that while there is no doubt that the
CSR voluntary guidelines issued by the MCA are an excellent
initiative, that by itself will not achieve the desired goal. It is
imperative for the corporate sector to treat these guidelines not
merely as ‘Corporate Social Responsibility’ but to treat the
guidelines as ‘Corporate Basic Responsibility’. These guidelines
should not be seen as something with which brownie points can
be scored by a company by showcasing some impressive ‘social’
activities, instead it should be realised that without implementing
these guidelines, the corporates will be doing no service to the
Nation or to themselves, as in the long run the Nation will have
to pay a very heavy price which it can ill afford. So let CSR
become CBR and let the corporates display that they really care
for the means as much for the goal they desire to achieve. 
DECEMBER 2010 (A-522)