For as long as one can remember, retail shareholders were never in the frame of any discussions on major decisions taken by corporates. On some occasions, there was a stand-off between promoters and significant shareholders, degenerating to the verbal equivalent of trading blows, but retail shareholders did not seem to take cognisance, and reflect on the impact that it would have, not only on the company, but also on their investments in the company. They were sometimes in offhand fashion described as “fill it forget it” investors, meaning that they had filled the forms for obtaining shares, and promptly forgotten about their investments in the companies.

Times have changed. Off and on there have been some measures taken by lawmakers and Regulators to ensure that the legitimate interests of small shareholders were protected. In fact, the Companies Act, 2013 (the Act) even conceived of a Board seat for the representatives of minority shareholders, but this being an optional provision, was ignored across the board. The Act also provided for class action suits, the relevant Section being brought into effect from June, 2016, two years after the Act came into force. There was considerable speculation on when the class action suits would begin to be seen, and what impact, if any, these would have on persons who would choose to desert Board positions at the first sign of any adverse development. The sweeping provisions of Section 245 of the Act, which travelled beyond the corresponding provisions in the US enactment, created some excitement, but when class action suits did not surface for a while, the provision relating thereto was beginning to be seen as a dead letter.

Fast forward to 2024, and two class action suits in high profile corporate entities have suddenly surfaced.

The ICICI Group, which comprises several entities, had over a few years, listed many of them, in order to broad base ownership, and to positively impact on the financials of those entities. These moves by the ICICI Group, and a few other groups, were seen as positive, since the stock market began to witness supply of stocks of entities which hitherto were the unlisted arms of the parent entity.

U-turns are not uncommon in the corporate world. The ICICI Group, after a few years of having ICICI Securities listed, decided that there was merit in delisting that entity, and folding it into the parent entity, ICICI Bank. Not unexpectedly, minority shareholders saw red. They were concerned that due process was not being followed, and that the valuation was incorrect. They also alleged that attempts had been made to influence shareholders to vote in favour of the delisting. According to them, the valuation was incorrect because it did not take into account the bull market run during the relevant period, and the consequent improved position of ICICI Securities. One related concern that was expressed was that the phone calls that were made to the shareholders, persuading them to vote in favour of the merger scheme, came from ICICI Bank, and not from ICICI Securities, giving rise to the apprehension that minority shareholder data had been shared by ICICI Securities with ICICI Bank. Notwithstanding the challenge mounted by minority shareholders, the resolutions were passed with a significant majority, possibly influenced, in part, by positive recommendations by the proxy advisory firms.

The question that ought to be addressed is whether a few years after bringing investors on board by promising them a bright future, an entity should move in the opposite direction, and merge the listed subsidiary with the parent. What happens then to the promises held out to minority shareholders? Should there not be a reasonably long period for companies to remain listed, and if delisting was to be done, should there not be a suitable reward for the shareholders, who stayed invested from the date of listing, till the date of proposed delisting?

What is significant is that a section of minority shareholders chose to oppose the proposed merger. On several occasions in the past, such moves would have gone through, unquestioned by any shareholder, and without needing the positive recommendations of proxy advisory firms. Is this an indication that shareholders are keeping close track of the companies in which they are invested, and applying their minds to the corporate actions that are being taken by the companies in which they are shareholders? They have been known to do so in the past in matters related to executive compensation. If such shareholder activism is beginning to manifest itself, it deserves support by Regulators, commentators and students of corporate governance. Hopefully, even proxy advisory firms should, while seeing merit in the economics of the merger, ask some questions on why the delisting is taking place, not long after the listing process.

ICICI Securities is not a case in isolation. Minority shareholders of Jindal Poly Films have initiated a class action suit with the NCLT alleging fraudulent conduct by the company’s promoters and management. They have alleged that the company has incurred wrongful losses of approx. Rs 2500 crores due to the actions of its promoters and directors. One of the defences mounted by Jindal Poly Films goes to the root of the matter. They have challenged the definition of “class” in the class action suit, stating that the defined class ought to be homogenous, which, in their view, it was not in the instant case. They have referred to the fact that individual shareholders, with varied circumstances, have come together, and it does not meet the criteria of homogeneity. This is a bit of a stretch. It should be adequate if the shareholders, even with admittedly varied circumstances, come together to challenge one or more actions of the management and the promoters. The commonality of being shareholders should itself establish the homogeneity required for 100 or more shareholders to make common cause, and to take the corporate to the appropriate legal forum.

Shareholder groups are also raising concerns on the corporate goals and objectives of some large companies. Earlier this month, a coalition of shareholders in a European company, Nestle, the world’s largest food manufacturer, brought up a proposal stating that the ratio of healthy foods that the company offers to consumers should be increased. This concern was voted on at the company’s AGM. Share Action, the activist NGO that put forward the resolution, was concerned that the company was excessively reliant on products high in fat, sugar and salt, and should move to offering healthier eating options. The concern was shared by leading public health experts in the Continent as well as by some significant institutional investors. Not surprisingly, the resolution did not go through. Sometime last year, the company had published a new nutrition target to sell more nutritious products by 2030, but it did not meet investor expectation for improving public health. The company sought to downplay the concern stating inter alia “that people can enjoy indulgent products in moderation, and there is nothing wrong with that.” The company further stated that if they were to set targets to increase the proportion of sales from the more nutritious segment, this would require the company “to weaken other parts of our portfolio, creating opportunities for competitors, without yielding public health benefits”. While food experts might quarrel on what is healthy and what is tasty (and rarely the twain do meet), what gives corporate governance protagonists some hope is the fact that even the portfolio of products of a food manufacturer is attracting attention of minority shareholders and activists. Corporates need to watch out for similar adverse campaigns in regard to all of what they do, and the manner in which they go about their work, since shareholders have now begun to stand up and ask inconvenient questions.

At one end of the spectrum, Regulators are putting in place newer provisions to safeguard the interests of minority shareholders and other stakeholders. At the other end of the spectrum are companies that mount clever defences to explain what, prima facie, does not pass the smell test. Caught in the middle are proxy advisory firms, who cannot routinely oppose all proposals of management, but must see whether there is public good residing in the proposals that representative groups of minority shareholders articulate based on their observations and research. In this context, it is worthwhile to take note of some of the proposed changes to voting guidelines that one proxy advisory firm has put out for public consultation. On the subject of RPTs, they have indicated that some additional practices need to be followed by companies if the firm has to support their resolutions. It is useful to step back and wonder  why RPTs are attracting a lot of flak. Firstly, neither law nor regulations, bar RPTs. Only guardrails such as the transaction being in the ordinary course of business, and at arms length, have been provided, so as to ensure that the promoters or the majority shareholders do not benefit from any conflict of interest in such transactions. However, providing a large number of procedural requirements tends to give the impression that companies would be well advised to avoid all RPTs, thus causing harm to themselves. The tendency of putting in place more procedural and substantive prescriptions, without perhaps determining whether there is any public interest that is served, needs to be given up.

In the case of remuneration, there is an overarching recommendation to cap it in absolute amounts. When it comes to Employee Stock Option Plans (ESOPs), the firm has stated that it will consider recommending voting against all remuneration related resolutions that do not disclose the expected level of stock options to be granted to the directors. Further, it has raised the question whether giving 75% or more of ESOPs to persons below senior management is a good practice. How such distribution will incentivise the senior persons, who admittedly have a higher responsibility to lead the company, is completely unclear. ESOPs being taken as a part of the fixed element of compensation, and predicting their future value, are needless complications. Isn’t this a matter in which companies and Nomination and Remuneration Committees should be trusted to do the right things, and shareholders should be encouraged to ask questions if something seems odd? Is ESOP a tool to reward and retain the better performers, or is it an instrument to reduce economic inequalities?

If the number of situations in which the proxy advisory firms recommend voting against resolutions significantly increases, it will be difficult for companies, going forward, to transact business in a competitive environment, by disclosing information, that has the elements of business confidentiality.

Every additional recommendation or practice that keeps companies on the straight and narrow path is prima facie welcome. However, in the process, we should not end up, promoting shareholder adventurism masquerading as shareholder activism.

PS: Even as this newsletter was being put to bed, came the welcome news of a SEBI order, based on investor complaints, directing NSE to go into the allegations of improper RPTs in Linde India. The theatre of battle is no longer limited to AGMs and EGMs. It can extend to regulatory fora as well. Investors who wrote out cheques, are finally asking for checks.