Shareholder Activism

India - Minority stakes gain a new voice

Tougher regulations and a trend toward better governance are giving rise to a new wave of activism in India by small, large and even foreign shareholders.

Companies in India are typically owned by insiders who control all decisions in cooperation with management, often conflicting with the interests of other shareholders. However, some developments have given minority investors a powerful voice.

First, tougher rules set in 2010 by India’s Securities and Exchange Board require mutual funds to disclose how they vote on shareholder resolutions. This accountability has led to voting by domestic institutions doubling in two years. Institutional funds even forced Maruti Suzuki, India’s largest carmaker, to rewrite a deal for a new plant in western India. Second, a requirement that companies offer electronic ballots has greatly improved access by India’s shareholders and the reliability of votes. Third, a rise in proxy advisory firms gives shareholders access to rigorous analysis to use as ammunition. Finally, as of 2013, majority shareholders are prohibited from voting where they have a potential conflict of interest. This measure strikes at the heart of owner-management impunity and gives minority shareholders a decisive say.

These elements came together when UK brewer Diageo acquired a controlling stake in India’s United Spirits in 2014. Minority shareholders, aided by proxy firm IiAS, were able to force management to disclose important financial details.

Foreign activists have also begun taking a close look at India. The Children’s Investment Fund took on Coal India, a state-owned miner, in 2012. The UK-based activist hedge fund established a large position in the monopoly and launched a bold demand for changes, including a hike in coal prices. The campaign ultimately failed, but as a challenge to the status quo, it set a precedent that will be difficult to ignore.

Azhar Khan is a Director in Brunswick’s Mumbai office.

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