Minority shareholders find their voice, finally.

March 3, 2014 |  Mumbai  

In the Maruti Suzuki case, mutual funds and LIC have taken the unusual step of criticising a decision

Much of the time, minority shareholders of companies tend not to question steps taken by their boards. But last week, seven leading mutual fund (MF) houses - HDFC MF, Reliance MF, UTI, DSP BlackRock, Axis, SBI MF and ICICI Prudential - wrote a strongly-worded, seven-page letter to the management of car maker Maruti Suzuki against the proposal to convert the company's Gujarat plant into a wholly-owned subsidiary of Suzuki. Another investor, Life Insurance Corporation of India, too has sought a detailed report on this from the company.

This is a rare occasion when the custodians of retail investors' funds have jointly questioned the decision taken by a company. The plan is to have Suzuki take over the plant at Vitthalapur, produce cars and sell them to Maruti. A fund manager says that this deal will erode Maruti's premium apart from constituting a corporate-governance issue. The decision, he declares, is not fair to Maruti shareholders. Analysts and other mutual funds feel that the project would necessitate new capital expenditure for Suzuki every year, leading to higher mark-ups on the cars produced there (and procured by Maruti), thus impacting its profit. In an earlier interview to Business Standard, Maruti Suzuki Chairman R C Bhargava had countered this analysis by saying that the expansion prospects as envisioned by the mutual funds were flawed. "What Suzuki has said is the unit would be commissioned with an initial capacity of 100,000 cars. Expansion after that will depend on demand," Bhargava said, and added, "We have clarified that
Suzuki will bring in new equity to the extent necessary. The analysts and mutual funds are assuming that it will be brought in only 'if' necessary. They are assuming Suzuki will not bring in equity but only increase the mark-up on the cars."

Silent spectators

The Maruti case is significant. Usually, as a study by proxy voting advisory firm InGovern shows, institutional investors tend not to raise awkward questions at board meetings. The InGovern study on the voting patterns of mutual funds in 2013 says that out of a total of 28,290 resolutions disclosed, mutual funds voted against just 1.5 per cent of them. They favoured 47 per cent of the resolutions and abstained from voting in 51.5 per cent. While no such data is available for LIC's participation in resolutions, experts say it rarely stands up as a naysayer. "These companies do not voice their opinion in corporate decisions. They typically skip the routine resolutions. They only raise their voice when controversial decisions are being taken," says Shriram Subramaniam of InGovern.

In fact, Subramaniam goes on to allege that in the Maruti case, it was known that the independent directors weren't too keen on the resolution, and therefore the domestic institutions should have been alert to the fact. Like him, many others in the investment community believe that the institutional investors aren't doing enough as minority shareholders.

The situation in India is quite the opposite of what happens overseas, where institutional investors are very active. For instance, when Walmart Mexico was named in a bribery case, the institutions demanded that the chief executive officer of Walmart US step down as he was responsible for the company's global business and hadn't been proactive in checking incidents related to bribery or fraud.

There have a few occasions when India's minority investors have raised their voices aggressively. In 2008, they protested against the inflated valuations when Satyam Computer Services announced its plan to acquire Maytas Properties and Maytas Infra. The deal didn't go through. In the same year, minority shareholders of Sterlite Industries India were adamant that a restructuring proposal floated by parent Vedanta was against their interests. Earlier this year, some minority shareholders complained that Siemens AG, the German engineering company, had paid a low price for acquiring additional shares of its Indian subsidiary.

However, experts also admit that in many cases, the minority shareholders can do little except to dump the shares of the company. Indeed, this is what is happening to Maruti too. "We redeemed some of our holding in Maruti a couple of weeks after the announcement, in late-January and early February," says a fund manager. "However, we are still holding on to some shares till more clarity emerges." Mutual fund brokers say that fund managers are ready to sell Maruti shares as there is no confidence that the company will review the decision on the back of shareholders' feedback.

From January 8, 2014, when it quoted at Rs 1,839.15, the Maruti stock dipped to Rs 1,563.2 on January 28. It closed at Rs 1,581.75 on March 3. Between January 8 and March 3, the stock lost almost 14 per cent; investors have lost as much as Rs 5,000 crore in market capitalisation.

Limited choices

But dumping stock isn't an efficient strategy either, says J N Gupta, founder and managing director of another proxy advisory firm, Stakeholders Empowerment Services. This can be effective only in a system that has high standards of corporate governance. In the Indian market, governance is an issue that crops up regularly.

When investors dump the stock because of perceived governance issues, it can actually hurt investors. There is a decrease in the number of companies that are seen as investment-worthy. As a consequence, all investors chase the same limited number of companies, causing volatility and increase in share prices. The increased demand and higher prices drive up price-to-earnings (PE) ratio of the stock, increasing risk and reducing returns on investment. This makes the markets unattractive for investors.

On the other hand, if the investors engage with the companies, governance standards will improve and the pool of companies worthy of investment becomes enlarged. This will lead to a reduction in risk, increase returns, reduce volatility and improve the confidence of investors. "Participation by investors in company meetings and engaging with promoters and management is, for these reasons, a must," says Gupta. Anil Harish of legal firm DM Harish & Company advises shareholders to either "take part in the voting on the resolutions proposed by a company or raise questions and apprise the promoters of their concerns in annual general meetings".

The general acquiescence of mutual funds in boardrooms is telling - as the InGovern figures show, they abstained from voting on 13,037 resolutions in 2013. This may have been the reason why the Securities and Exchange Board of India, or Sebi, is said to be exploring the possibility of creating a platform for non-controlling shareholders. (Non-controlling shareholders are individual or institutional stakeholders who are neither promoters nor have board representation.) This will help to protect the interests of minority shareholders and improve corporate governance.

Till such a time as such platforms and measures are adopted, minority shareholders may have little leverage against corporate decisions, to the disadvantage of retail investors. The fact that mutual fund investors in Maruti are disposing of their stocks seems to indicate that the protest of the sort they carried out may not yield much dividend, at least at this point of time.


The minority shareholders could play a more meaningful role in companies once the Companies Bill, 2012 is renacted to replace the half-century-old Companies Act, 1956. The Bill incorporates some sweeping changes related to minority shareholders.

Board representation: The new Bill mandates representation in the board for minority investors. Currently, any appointment of a director to represent the small investors is at the discretion of the company. It also says that at least one-third of the total number of directors in listed companies should be independent directors. (An independent director is a person who is not related to the promoters or other members of the company). Having independent directors may not be a proven method of deterring malpractices, yet could ensure greater accountability. The new Bill also warrants that in case of a company with more than 5,000 members, a shareholders' meeting should have the personal attendance of at least 30 members, failing which such a meeting should be adjourned.

Class-action suit: The Bill has a provision for class-action suit to allow shareholders to seek damages from the company and its directors for any fraudulent act. Shareholders will also be able to seek damages from auditors and audit firms in case of mis-statement of facts.

Exit option: The new Bill says that if a company has funds remaining unused after being raised in an initial public offer and wants to change the objectives for which the funds were raised, it has to provide an exit opportunity to shareholders who do not support such a step. It also decrees that such an exit should be offered at a price specified by Sebi to help shareholders move out at a reasonable price. This is of special significance for stocks that plunge below offer price soon after listing.

Protection for whistleblowers: Under the new Bill, an independent director of a company or any employee who brings a company's malpractices to light will be protected from unfair treatment by the management. The new legislation requires all listed companies to establish in addition a mechanism through which employees can report to the chairperson of the audit committee their apprehensions about the conduct of the business, its accounting methods or any other aspects of business. The companies have to provide details of such a system on their website.

Insider trading: The new Bill prohibits insiders of a company from trading directly or indirectly in shares both in the cash and futures market. Any person who violates the clause will face a cash fine or imprisonment or both.