The biggest challenge regulators face is to secure the interests of minority shareholders in a corporation. Minority shareholders and retail investors, holding few shares as stock market investments, have virtually no say in the strategic decisions made by the management and backed by majority shareholders. Corporations are largely run by managements that are controlled by the majority shareholders.
The problem is more severe in developing economies. Especially in countries like India, where more than 70 per cent of the businesses are owned by large business groups and families, it is generally perceived that majority shareholders run the business in their own interest, with little concern for the interests of minority shareholders.
Pro-shareholder initiatives
Over the years, Indian regulators have taken a number of initiatives to protect minority shareholders’ interests. Earlier, annual general meetings were conducted in remote and inaccessible locations, which did not allow minority shareholders to be physically present and vote; in effect, the majority shareholders always had their way!
The new Companies Act now deems it mandatory for all companies to provide for electronic voting on shareholder resolutions, allowing minority stakeholders to have their say. The Act also requires all transactions related to the majority shareholders to be approved by 75 per cent of the minority shareholders. Institutional investors, such as Life Insurance Corporation of India (LIC), which passively invest large sums into corporates, are also required to ensure the interest of their shareholders, through responsible voting on issues impacting minority shareholders.
A number of proxy advisory firms are also now working with, and educating, minority shareholders to secure their interests in critical resolutions that impact their interests. As a result, instances of shareholder activism have steeply increased. This is very encouraging!
However, in spite of such developments, a bigger question still lingers; are the interests of minority shareholders now fully secured? Going by some of the recent instances in the Indian corporate landscape, shareholder activism, and protection to minority shareholders, still seems a distant dream!
Grasim-AB Nuvo merger
Recently, the Aditya Birla Group announced the merger of two of its largest companies, Aditya Birla Nuvo Ltd and Grasim Industries Ltd. Kumar Mangalam Birla’s logic was that the merger would create one of India's largest and well-diversified companies with a combination of cash-generating and high-growth businesses.
The markets perceived the merged Grasim as complicated entity holding together a number of unrelated businesses including telecom, manufacturing and financial services, with no synergies whatsoever under ‘one roof’, and consequently destroying minority shareholder value. Especially with focused players competing with Grasim in each of its businesses (for example, Bharti Airtel and Vodafone in telecom) the probability that the merged Grasim will create superior shareholder value is quite low. Analysts also point out that the merger is intended to help ‘cash-strapped’ Idea Cellular garner resources to compete with Reliance Jio; post merger, Idea Cellular will have access to higher levels of cash from Grasim, as compared to Aditya Nuvo.
The stock markets were not convinced with the merger plan and believed that the announcement is not in the best interest of the minority shareholders. There was a massive ‘sell-off’ of shares in both Grasim and Aditya Birla Nuvo, sharply pulling down the share prices.
Cairn-Vedanta merger
Similarly, majority shareholders recently brought in a resolution to merge Vedanta Ltd and Cairn India Ltd. Vedanta claims that the merger will create a large diversified natural resources company, thereby reducing risk of volatility in cash flows. However, the market sees the deal as creating a complicated entity with congregation of diversified businesses. Also the deal is perceived as providing Vedanta access to Cairn India’s huge cash reserves, close to ₹25,000 crore.
Analysts argue that such cash will help Vedanta prune its high debt and thereby reduce interest costs and improve profitability; a case not in the best interest of the minority shareholders of Cairn India.
Such consolidation of unrelated businesses by the Aditya Birla group as well as the Vedanta–Cairn deal come in the context where more and more conglomerates are actually spitting their unrelated businesses in order to become more nimble and agile so that they are able to better compete with focused players. This includes companies such as Wipro and L&T in India and such corporates as HP, eBay, Paypal and Google in the global context. In this age of split-ups, when a group consolidates unrelated businesses, it is bound to create a backlash among minority shareholders.
Maruti’s new plant
Last year, a similar issue came up when Maruti Suzuki shareholders were asked to approve the setting up and operation of a new Gujarat plant, 100 per cent owned by Suzuki. The plan was for Suzuki to take over the manufacturing of cars, away from Maruti Suzuki and sell the cars back to Maruti Suzuki ‘at cost’.
Suzuki argued that this deal would free up Maruti Suzuki of the manufacturing function, allowing it to focus completely on marketing, after-sales services and dealerships. However, analysts and proxy advisors saw this deal as stripping away the company’s manufacturing capability and positioning it as a mere trading company; an act that would go towards reducing its valuations.
This being a related party transaction (to Suzuki, a majority shareholder), it was considered extremely detrimental to the interests of minority shareholders. Eventually, close to 90 per cent of the shareholders are reported to have voted in favour of Suzuki’s Gujarat plant in spite of the caution raised by proxy advisory firms.
In essence, the intent of shareholder activism seems to have gained momentum in the country; however its ability to actually check majority shareholder’s self-centred actions on the ground is yet to become visible!