Rise in Shareholder Role in AGMs on Corporate Governance Issues

India Inc. is reportedly seeing a rise in cases where shareholders have come to play a key role in voicing concerns and posing questions to the management and promoters at annual general meetings (AGMs).

Called ‘shareholder activism’, the trend has reportedly caught on in corporate India. Large shareholders, including mutual funds and institutional investors, have come to bring about changes in governance. Essentially, the term shareholder activism implies the shareholders’ efforts to bring about changes in company governance.

Some of the recent instances include entertainment companies such as Zee Entertainment and Balaji Telefilms’ AGMs. While institutional investors reportedly sought the removal of the company Managing Director (MD) and CEO at Zee Entertainment, at Balaji Telefilms, remuneration-related resolutions for the MD and joint MD did not get the assent of shareholders at the annual general meeting held in September, as per news reports.

There have been other examples in the recent past. It may be recalled that in August this year, automotive company Eicher Motors’ shareholders turned down a proposal to reappoint its managing director over a salary increase. More recently, the company has again sought approval of shareholders on the remuneration of its managing director. Earlier, in July, two-wheeler manufacturer Hero MotoCorp, investors and shareholders challenged a resolution to hike remuneration to its chief executive and chairman. However, because it was an ordinary resolution, it was approved because of a higher promoter stake (35 per cent).

Reasons for rise in shareholder activism

Some of the reasons for the rise in shareholders voicing concerns may be attributed to several factors including empowered institutional investors and funds, who are backed by data, the pandemic and the ensuing lockdowns of 2020 which created economic uncertainty before the recovery took shape, among others.

The rise of proxy advisory firms that advise institutional investors on how to vote on several actions that companies take is also cited by experts as one of the reasons that have led to an increase in shareholder activism.

Analysts note that institutional shareholders like alternative investment funds or mutual funds have an increased holding in listed firms, which has led to their concerns being heard. Institutional investors are entities that put together funds from several investors to invest in securities or other financial assets.

In June 2021, the Ministry of Corporate Affairs amended rules that pertain to meetings of boards and their powers that are under the purview of the Companies Act, 2013, as per reports. Accordingly, there was a shift from physical to virtual meetings in the face of the coronavirus pandemic. This meant that boards could approve matters pertaining to mergers or other aspects at virtual meetings, which experts say may increase participation from shareholders.

As per the Companies Act 2013, electronic voting is mandatory for listed or other firms with at least 1,000 members. The availability of e-voting has increased participation of shareholders and eased voting, experts note.

Markets regulator SEBI in December 2020 also introduced a mechanism to ensure seamless and efficient electronic voting for shareholders. As part of the SEBI move, which would be implemented in phases, the first phase would help shareholders directly register with depositories so they could access e-voting pages of many e-voting service providers through depository websites. The other phase wherein the depository will need to validate the holder of demat account via an OTP would be brought in within a year from the completion of the phase 1, as per reports.

Further, the stewardship code that has been brought in by regulators such as SEBI, IRDA (Insurance Regulatory and Development Authority), and the Pension Fund Regulatory and Development Authority have ensured that institutional investors have a greater participation and say in corporate governance. Markets regulator SEBI reportedly brought in the Stewardship Code for alternative investment funds and mutual funds pertaining to their investment in listed equities, which was made applicable in July 2020. Further, SEBI also mandated in March 2021 that mutual funds would need to vote on company resolutions compulsorily. The mandate would be brought into effect from April 1, 2022 as per reports.

Conclusion

India has seen a surge in shareholder activism in the recent past, with several instances wherein institutional investors and other shareholders have begun to voice concerns over a range of issues pertaining to corporate governance at annual general meetings (AGMs).

FAQs

What is shareholder activism?

The term shareholder activism is used to define shareholders’ efforts to bring about changes in company governance.

Who are institutional investors?

Institutional investors are entities that put together funds from several investors to invest in securities or other financial assets. They could be mutual funds, insurance firms, pension funds or large banks, among others.

What is a proxy advisory firm?

A proxy advisory firm provides guidance and data to large retail investors or institutional investors on shareholder voting and corporate governance issues.