“Proxy Solicitation – will it catch up in India?”

The Institutional proxy advisory firms are in vogue. The latest to hop on to the bandwagon is the former executive director of Sebi, JN Gupta, who along with two others, have set up Stakeholders Empowerment Services ( SES), a non-profit venture. Otherwise InGovern and Institutional Investor Advisory Services India (IIAS) are the two leading proxy institutional advisory firms in the country.

In the recent past, these firms came out with research reports on SesaGoa-Sterlite, Escorts and Akzo Nobel on their merger proposals, which it these firms perceived to be unfriendly for minority shareholders.

It is the right of shareholders to ask questions, whether proxy advisory firms exist or not. Promoters and management of companies have yet to consider minority shareholders as long-term partners that they need to provide answers to. After all, it is the company that has raised money from capital markets. If companies are uncomfortable answering questions, they shouldn't list and raise funds from other shareholders.

Whether proxy solicitation services exist or not, it is a level-playing field. The Indian corporate structure is still largely promoter controlled and hence most of the resolutions that are put to vote are easily passed without much resistance from minority shareholders, even though such resolutions may not be in the best interest of minority shareholders. This is unlike developed markets, where the promoter holding is lesser comparatively and hence the board needs to resort to proxy solicitation to pass major resolutions, especially against activist and possibly dissident shareholders.

In India, all listed companies have not even achieved the minimum public shareholding norms as laid down by SEBI and hardly does any minority retail investor vote in company resolutions. In such a scenario, proxy solicitation will only help the promoters. If allowed legally, then these companies will formally be able to solicit more minority votes using company's funds. We need to first attain a corporate environment with more diversified shareholding structure along with increased institutional and shareholder activism before we can introduce proxy solicitations for Indian companies.

Although, with the advent of proxy advisory firms such as InGovern, shareholder activism and opposition from non-controlling shareholders have increased in recent times, we still have a lot to catch up in terms of board structure, control, governance practices, etc and greater institutional investor involvement in governance matters.

Having said the above, proxy solicitation can also help listed companies to improve investor relations and become more transparent, if disclosures for proxy solicitation are made more stringent. In developed markets, corporate issuers need to send out detailed information statement to their shareholders while soliciting proxies.

Proxy solicitation firms help corporate issuers understand their shareholder base and their voting patterns in company meetings, especially from institutional shareholders. In addition to voting intelligence and reports,proxy solicitation firms also ensure higher vote participation in meetings.

However, as stated earlier, the Indian context is a little different form the developed markets. Unlike in developed markets, we do not have an environment of hostile takeovers or shareholder activism, where bad management is replaced by dissenting or powerful shareholders. Cases like Satyam, Kingfisher, Deccan Chronicle, etc are classic examples. Since the majority shareholding is controlled by promoters, most of the resolutions are passed without much opposition. We need to first attain a corporate environment with more diversified shareholding structure along with increased institutional and shareholder activism before we can introduce proxy solicitations or Indian companies.

In developed markets, proxy advisory firms play a very important role and influence how most of the institutional investors vote. Hence, companies or issuers generally engage proxy solicitation firms for their general meetings to deal with proxy advisory firms as well as institutional investors to understand their voting proposals for meetings. The relation between proxy advisory firms and proxy solicitation firms is congenial as proxy solicitation firms realize that proxy advisory firms influence voting to a large extent. Also, talent moves between these two sets of firms.

Indian companies have seen a lot of shareholder activism and opposition from non-controlling shareholders in company resolutions in recent times, especially since proxy advisory firms such as InGovern has started coming out with vote recommendations for such investors. A few recent examples are listed below:

* 23.15%of votes were against the merger of 3 Promoter controlled unlisted entities with Akzo Nobel India.
* More than 20% valid shareholders of Sesa Goa voted against the merger of Sesa Goa, Sterlite and other unlisted entities of the Vedanta Group
* 60.36% of valid votes of non-institutional shareholders voted against the merger of Satyam Computers and Mahindra Satyam.
* Certain shareholders having aggregate voting rights of more than 5% in Halonix complained to EBI/ED over the company's violations of FEMA and misleading public shareholders
* UK based hedge fund TCI filed a case against Coal India's Board for its rollback of price increase under government's directives

This shows increasingly positive signs of increased shareholder activism in India. However, we have noticed that inspite of such large opposition from minority shareholders and growing engagement by institutional investors on corporate governance matters, these resolutions get passed due to large promoter holdings in these companies.