The Edge

The Drift: India needs rockstar shareholder activists. Rambling institutional advisors are not enough

Another day. Another unicorn. Another IPO.

It is great to see India’s stock markets booming and talk of the National Stock Exchange’s Nifty hitting 20,000 sooner than later. But, having seen booms, busts, and frauds in a long career of business and market-watching, I am tempted to ask a simple question: What if something goes wrong?

Billion-dollar valuations and gadzillion-rupee initial public offers (IPOs) of shares show that capitalism is alive and kicking in India, but I have reasons to believe the kick can land in the wrong place sometimes. Shareholders, especially minority, middle-class savers, can be left in the lurch and holding the baby if things go wrong in a company. Look no further than memories of Vijay Mallya and Nirav Modi running away from Indian banks after loan defaults. At least in the case of banks, you can blame the borrowers in some way because loans are a fixed liability for the borrowers. You can’t say the same with shares. Remember, SEBI always warns you in a mumbled voice or in fine print: Mutual funds are subject to market risks. Please read the offer documents carefully.

Here’s where there is a very strong case for vigilance from the side of shareholders. Last week, India saw shareholder activism emerge mainly from institutional investors concerning three companies: Eicher Motors, Allcargo Logistics, and in a big way, Zee Entertainment Enterprises.

It is not as if these were the first Indian companies influenced by shareholder activism. India has had a few cases as proxy advisory firm InGovern noted in a comprehensive study. But it summed up what is in many a shareholder’s heart.

“Indian companies need to give due importance to minority investors and realize that shareholder activism is here to stay. More institutional investors, including the public sector institutional investors, should engage actively with companies on routine and non-routine proposals. Regulators need to create an environment that fosters greater activism that ensures efficient management of companies and increased capital productivity in India.”

Well said. But. But. But.

I would like to see faces and names and voices. Not just “institutional investors” who have a tendency to be methodically understated as they raise their voices in shareholder tussles.

The good news is that India’s company law passed in 2013 gives increased recognition to shareholder activism. However, by and large, only proxy advisory firms such as InGovern and the other major proxy advisory, Institutional Investor Advisory Services, are doing the job.  We need more such institutions but more important, noisy individuals — be they Smart Alec chartered accountants, Alpha-seeking hedge fund managers, habitual public interest litigators or very simply, prominent high net worth individuals or minuscule retail investors.

India has seen takeover tycoons such as the late Swraj Paul and Manu Chhabria rocking the boats of listed companies but ironically, whenever I think of shareholder activism, the first face that comes to memory is that of a trade union leader, Rajan Nair. Nair was leading labourers at Telco (which is now Tata Motors) and showed up at the annual general meeting of the company as a shareholder to make a point or two in the 1980s.

More recently, we had Cyrus Mistry fighting a boardroom battle in Tata Sons Ltd that lords over listed Tata companies and N. R. Narayana Murthy, co-founder reduced to the state of a minority shareholder, playing the role of an activist in Infosys. In both cases, power struggles led to these figures becoming activists. I even once described Mistry as India’s first activist shareholder — though that happened more by default than design.

What we need really is a long list of activist shareholders representing passive minority investors. They need not be significantly involved in power struggles to acquire companies but can be a source of vigilant wisdom on issues related to dividend payouts, diversification, appointment of independent directors and a whole lot of other issues that preserve and promote shareholder value.

America has had a few rockstar names such as Bill Ackman,  Daniel Loeb and Carl Icahn doing awesome work. In India’s “promoter” capitalism, families often control leading public companies. This can be a double-edged sword as the right families act as shareholders’ custodians, but the wrong ones dress up for IPOs and then forget minority shareholders.

India needs rockstar activist shareholders as an increasing number of highly valued companies go public in a nation where millions of small investors are stepping gingerly into stock markets for the first time. Mutual funds are passive by design and hardly make real noises. We need faces and voices that put the fear of God into erring promoters and lazy, bureaucratic or self-serving CXOs.

Activist rockstars can raise the awareness of small investors and retail buyers to stay vigilant. With social media becoming increasingly powerful, we can create a culture of vigilance important for the growth of progressive market capitalism in India.

Madhavan Narayanan
Senior Journalist & Commentator

MADHAVAN NARAYANAN

The author is a senior journalist and commentator who writes and speaks on thought leadership issues in the fields of political economy, governance, business and culture. He has worked for The Economic Times, Reuters, Business Standard and Hindustan Times in a long career covering these issues. He is on Twitter as @madversity

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