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Does your fund manager really protect your interest?

Earlier this week, 55% of the shareholders of Citigroup created a major flutter on Wall Street when they blocked a proposal to raise CEO Vikram Pandit's remuneration to $15 million for 2011 from a token $1 in 2010.

American shareholders have a say on the pay of corporate executives and across the West, institutional shareholders take an active interest in the way managements run companies. Still, the Citi revolt took every Wall Street watcher by surprise.

What about India? Investor activism is yet to take root here, and in the few instances where minority investors have intervened, they have had little success. For example, institutional investors had reservations about the merger of Sesa Goa and Sterlite Industries that was aimed at cutting parent Vedanta's debt, but could not stop the merger.

Non-institutional shareholders had some success last year, according to InGovern Research Services, a Bangalore-based proxy-voting advisory firm. Managements of three small companies had to withdraw some proposals after minority non-institutional shareholders protested.

The Toughies: Not Indian

Investors asking tough questions are largely foreign entities, the latest instance being UK-based activist hedge fund The Children's Investment Fund's (TCI) threat to sue Coal India and its management last month for "compromising the interest of minority shareholders by agreeing to sell coal at a discounted price".

Last year, New York-based hedge fund QVT Financial sued Zenith Infotech for failure to repay bonds. Now, Los Angeles County Employees Retirement Association (Lacera), a shareholder of Cognizant Technology Solutions, is seeking changes that it believes will improve corporate governance practices in the software major.

What about their Indian counterparts? In February this year, a proposal by paint manufacturer AkzoNobel India to merge three unlisted entities with itself scraped through only because UTI and ICICI Prudential Life Insurance, which together held a 6.5% stake, abstained from voting even as other institutions voted against the proposal.

More than the domestic institutions - asset management and insurance companies - it is the foreign investors, including hedge funds that are taking the lead in investor activism in India, says Amit Tandon, managing director at Institutional Investors Advisory Service (IIAS), a Mumbai-based proxy-voting advisory firm he co-founded after leaving ratings agency Fitch.

Investor activism is not limited to voting on resolutions proposed by the management but also asking the management tough questions and engaging with it. "Foreign institutional investors are more vocal. The domestic institutions tend to tip-toe around issues," says Tandon.

Fear Factor

Domestic institutions worry that companies may cut off access to management and information if they ask tough questions, says Shriram Subramanian, founder and managing director of InGovern. Asset management companies (AMCs) also worry about losing clients and money - a large part of their assets come from corporate sector. "It is always easier to vote against a proposal of an MNC than that of an Indian promoter," says Subramanian.

TCI Precedent?

All eyes are now on the outcome of TCI and Coal India dispute. "The TCI action has served to raise the awareness level among investors about their rights and responsibility," says Tandon. It has the potential to change the way investors act in future.

In general, investors have exited a company if they did not agree with some decisions of the management, even if they liked the company. That need not be the case always. The TCI intervention illustrates that there is a middle path that investors can take.

In any case, it is likely that foreign institutions will continue to lead shareholder activism in India. "The foreign institutions have clear voting policies and they will act accordingly," says Subramanian.

Domestic mutual funds often abstain from voting when they do not agree with a proposal, and until March 2010 were not required to have a clearly laid out voting policy. An IIAS study of voting patterns of the 41 AMCs during 2010-11 found that 11, including top 9 AMCs, completely abstained from voting on resolutions. Others voted on a subset of the resolutions and only 1% of the voting by AMCs went against management resolutions.

Abstaining is akin to abdicating one's duty. But change is in the air, thanks to the intervention of markets regulator, Securities and Exchange Board of India (Sebi).

In March 2010, Sebi directed all AMCs to disclose their general policies and procedures on voting on resolutions proposed by the companies as well as the actual exercise of voting. It expected such initiatives would make AMCs play an active role in improving corporate governance in listed companies. "2010-11 was the first year and the fund managers were still to get a grip of the Sebi requirement," explains Tandon. The AMCs will not want any regulation risks.

New Catalyst

IIAS and InGovern have over the past year put out vote recommendations for several Indian companies for use by institutional investors. Some of their advice was heeded and others looked at with curiosity. Globally, it is a common practice for institutional investors to seek the opinion of proxy-voting advisory firms, as illustrated in the Citi executive pay episode.

Both Tandon and Subramanian are confident that shareholder activism will gradually increase, particularly as more money comes into the market through mutual funds and various retirement savings funds and investors realise their rights. High net worth individuals too are set to emerge as a pressure group. What about the AMCs? Their 'ayes' are probably not going to stop anytime soon.

Source: Economic Times

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