Over the past few months, a simmering issue for India’s public market investors burst out into the open. Minority and institutional investors are pushing back against company promoters and the management by voting against shareholders’ resolutions, and in some cases defeating some. 

In a sign that the Indian equity market is slowly maturing, investor activism against high-profile companies has picked up in the past few years. In 2018, Apollo Tyres’ shareholders voted against the salary hike of the company’s Managing Director Neeraj Kanwar in a year when profits fell. Two years ago, investors also voted down the reappointment of Housing Finance Development Corporation’s chairman Deepak Parekh because of his concurrent directorship in seven listed companies at the time. Automobile maker Maruti Suzuki India’s shareholders were against the company transferring its Gujarat plant to a group company through a related party. 

However, in the past few months cases of investor activism have surged, leaving promoters scurrying for cover in some cases. But what’s actually happening and what does this mean for the Indian equity market? Let’s take a closer look.

Zee dodges Invesco’s management change attempt

Run-ins between minority shareholders and promoters happened in fits and starts in the past and Zee Entertainment Enterprises is the latest one.

The power of non-promoter shareholders is at the forefront of the ongoing dispute between Zee Entertainment Enterprises (Zee) and its largest institutional shareholder — Invesco, which holds Zee shares through Invesco Developing Market Funds and OFI Global China Fund. On September 15, Invesco, which holds an 18% stake in the company, called for a special shareholder’s meeting to remove Punit Goenka, the CEO of Zee and son of Subhash Chandra, the founder of Zee, and two independent directors.

Even before the  EGM could be held, Zee turned to the Japanese conglomerate Sony to rescue them. On September 23, Zee’s board of directors announced a merger with Sony Pictures Networks India (Sony India). Following the merger, Sony India would hold a 47% stake in the merged entity for $1.5 billion (Rs 11,800 crore).

As part of the merger agreement,  Goenka would remain at the helm of the merged entity but Sony would appoint the majority of directors to the new board. At the time the deal was penned, Zee’s promoters held a 4% stake in the company. According to the details of the merger with Sony India, Zee’s promoters have the option to increase their stake to 20%. In order to receive this, Zee’s founders will sign a non-compete agreement with the merged entity.

Once the news of the merger was announced, the outlook for the company, considered a laggard in the broadcasting industry, turned positive. 

Zee’s stock surged by nearly 80% in two weeks, brokerages changed their tune, and big investors began buying stock. In August, Prabhudas Lilladher cut its earnings per share (EPS) and EBITDA margin estimate on the company due to lower expected advertisement revenue. However, following the merger announcement, the brokerage upped its target price and increased its price to earnings (PE) estimates. In addition, superstar investor Rakesh Jhunjhunwala purchased 50 lakh shares of the company a day before the merger announcement was made. Following the announcement, Blackrock purchased 3 lakh shares of Zee in an open market transaction. Just four months earlier, Blackrock had sold 18.8 lakh shares in the company.

While the institutional investor is not averse to the merger, they are against the current management of Zee. And in order to oust Goenka, Invesco took Zee to the National Company Law Tribunal (NCLT) to force the company to conduct an EGM in order for a special resolution to pass, removing Goenka. With no headway from the courts, Invesco penned an open letter to Zee’s founders stating the management has “demonstrably destroyed shareholder value” and the merger “unfairly” favours Goenka and the promoters. Now Invesco says that it had earlier brokered a deal with Reliance Industries for a merger with Zee. This was not disclosed by Zee publicly till Invesco’s revelation. 

This legal ordeal is far from over, but proxy advisory firm IiAS believes it’s all a mere “distraction.” IiAS urges investors to realize that it’s their votes, and not the court’s decision, that will decide the future of Zee, with or without Sony India.

Jindal Steel’s subsidiary divestment and Siddhartha Lal’s MD pay hike

The recent surge in investor activism did not start with Zee Entertainment Enterprises or even Eicher Motors, but with Jindal Steel and Power (JSPL). Back in May 2021, following a board of directors’ approval, JSPL decided to divest its 96.4% stake in Jindal Power (JPL) to its promoter controlled entity Worldone for a cash consideration of Rs 3,015 crore. According to this proposal, JSPL would have had to take over JPL’s liabilities worth Rs 4,386 crore. 

This amount was considered minuscule in comparison to its power generating assets (estimated at Rs 15,000 crore) and its annual net profit (Rs 2,000 crore in FY21. However, JSPL said the reason for the sale was to bring down its overall debt, which was Rs 28,000 crore at the end of FY21.

Prior to the confirmation of this sale, JSPL held meetings with its major institutional investors including Kotak AMC, Goldman Sachs, IDFC MF, Enam Holding, ICICI Prudential Life Insurance, etc. Reports suggest that the sale of a profitable JPL to JSPL at a lower valuation than expected irked investors. Two proxy advisory firms — Institutional Investor Advisory Services (IiAS) and InGovern Research Services (InGovern) advised JSPL’s shareholders to reject the acquisition. 

In a report, IiAS stated that the rationale to sell JPL to JSPL was unclear as the need to reduce debt was “not an immediate nor necessary concern”. InGovern added that with power demand rising and JPL’s plants fully operational, the company’s outlook is intact. IiAS estimated the enterprise value of JPL to be close to Rs 9,400 crore, or three times the equity consideration offered by JSPL. On the concern of debt reduction, IiAS said the sale of JPL would have reduced JSPL’s cash flows and concluded the overall impact on the parent company’s credit profile will be negligible. 

These concerns came to light before the company approached shareholders to seek approval on the acquisition between May 21-23. JSPL’s extraordinary general meeting (EGM) was scheduled for May 24. Because of the concerns raised by proxy advisory firms, JSPL postponed the EGM and decided to amend the divestment agreement.

Another company to see investors scuttling a management decision is Eicher Motors’ salary hike for Managing Director Siddhartha Lal, son of Vikram Lal, the founder of the automobile maker. In August, Eicher Motors’ shareholders rejected the reappointment of Lal as the company’s Managing Director via a special resolution. Over 25% of shareholders were against a 10% hike in Lal’s salary. 

Proxy advisory firms suggested that executive compensation should be tied to a company’s profitability. And in FY21 Eicher Motors’ net profits declined by 26% and revenue by 5%. Therefore hiking the Managing Director’s salary by 10% was not justified, especially as the company raised the median employee’s salary by under 2%.

Eicher Motors’ management will approach shareholders again in an EGM seeking reappointment of Lal as Managing Director, with a revised salary payout proposal. However, it looks like institutional shareholders have made their unhappiness known on rising executive pay. Eicher Motors isn’t the only automobile company to see resistance from institutional investors on executive compensation.

Shareholders miffed by auto industry pay hikes

Another emerging point of dispute between companies and shareholders was executive compensation. This has boiled over in the automobile industry, with the salaries of top management being rejected by shareholders. The driving force behind the rejections of salary hikes to executives are institutional investors.

Similar to what happened with Eicher Motors, Institutional investors were miffed by the large salary increases to the executives of other automobile makers, especially following dismal sales during the pandemic-ridden FY21. Domestic mutual funds and foreign institutional investors (FIIs) rejected salary hikes to the executives of Bajaj Auto, Hero MotoCorp (Hero), and Balkrishna Industries. In the case of Bajaj Auto and Hero, more than half of domestic mutual funds and FIIs rejected salary hikes to Rahul Bajaj, Chairman Emeritus at Bajaj Auto Pawan Munjal, Managing Director of Hero. However, since both companies’ promoters account for a significant percentage of the company’s shareholding, the ordinary resolutions passed. 

The concern for investors was that despite falling profits, Hero and Bajaj Auto sought to increase the promoter management’s emoluments. Investors were also concerned about the rise of electric vehicles (EVs) and hence the growing threat of smaller companies to the incumbents.

Another concern for shareholders was the difference in the higher pay packages to executives versus employees. In addition to the three two-wheeler makers, salary hikes at Ashok Leyland, Tata Motors, and Balkrishna Industries grew as against the hike given to median employees. This is measured by the ratio of the remuneration of the top executive (Managing Director, CEO, Chairman) to the median employee.

While the resolutions of Bajaj Auto and Hero’s executives sailed through, it didn’t for Eicher Motors’ Managing Director Siddhartha Lal.

What is driving these bouts of investor activism?

Over the past year, several issues of poor corporate governance have been met with resistance from shareholders. Whether it was Vedanta’s delisting at a paltry price compared to the value ascertained by advisory firms, compensation packages to executives at Balaji Telefilms, Lupin, or issues with a company’s policies with Burger King India and V-Mart Retail. But why has all of this boiled over in recent months?

Proxy advisory firms suggest that the main catalyst for institutional investors picking up governance issues is the SEBI's Stewardship Code, issued in December 2019. Under this code, institutional investors should strictly monitor their investee company on “corporate governance, board structure, and diversity, remuneration, capital structure, related party transactions, opportunities or risks including environmental social and governance ("ESG") risks.” This is probably driving institutional investors to look closely at a company’s performance and policies, and preventing companies from sweeping governance issues under the carpet.

Some proxy advisory firms also suggest the growth of India’s retail base has contributed to investor activism. In FY21, over 1.4 crore dematerialized accounts were opened, which was a three-fold increase over the previous year. However, others believe the thrust of activism is initiated by either proxy advisory firms and institutional investors (due to conducive regulatory framework), as was seen in the case of JSPL, Eicher Motors, and Zee. The advisory firms’ recommendations are heeded by retail investors and enforced through remote voting.

Regardless of the origin of Indian investors’ activism, institutional investors, retail investors, or proxy advisors, the markets will be better off because of it.