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BOTTOMLINE: India Inc’s rude transformation

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The status quo has been disturbed for family-run businesses with big investors raising the stakes, and that’s not a bad thing

BOTTOMLINE: India Inc’s rude transformation
It was unheard of some years ago to find promoters of companies at the mercy of independent stakeholders. That's changed. Large institutional and private investors are making their presence felt today by voting against resolutions they believe don't serve the interests of shareholders at large. And that's driving a shift in control of power at India Inc.
Call it the rise of shareholder activism if you will, but this phenomenon has the ability to significantly alter the governance practices of Indian businesses, by making promoters and CXOs more accountable. What's more, there are several regulatory changes too that are aimed at resetting the present equation. These are big shifts for much of India Inc to cope with, and may well redefine their governance.
We take quick stock of the evolving landscape and what this could spell.
Rise of the shareholder
There has been a slew of recent instances of shareholder actions against promoters and boards of companies that have put the spotlight on governance and proxy advisory players. And this could well be the new normal.
Just a few days ago, Yes Bank, a large shareholder in Dish TV put its Directors on notice, taking umbrage to them not reconsidering fundraise via a rights issue and not reconstituting the board despite it recommending this on several occasions. Will this lead to the board control slipping away from the promoters? Quite possible.
A little earlier Eicher Motors had to reduce the payout cap for its Managing Director, Sidhhartha Lal to 1.5 percent of profits from 3% after shareholders defeated the earlier resolution. Vedanta too faced shareholder ire with institutions voting against the appointment of UK Sinha, Dindayal Jalan, and Akhilesh Joshi, who they felt was not acting "independently". The resolution was passed though, with promoter support.
Zee Entertainment is the other company that has drawn attention from proxy advisors against the appointment of Ashok Kurien as an independent director. Ashok is a founder of the company and till recently classified as a promoter, and hence not considered independent. Balaji Telefilms is the other entertainment company that saw resolutions for compensation to Ekta Kapoor and her mother Shobha Kapoor being defeated by shareholders. Even Jindal Steel & Power had to revise the deal for the sale of its power business, Jindal Power, to promoter entity Worldone.
These are just a few of the recent instances, and they all indicate one thing. Don’t take big investors for granted. They are likely to vote with their feet.
The diminishing promoter
The other notable trend is the shrinking role and stake of the promoter in businesses. This is especially true for new-age businesses led by first-time entrepreneurs, but not alien to age-old enterprises seeking growth capital either. In the start-up world, it is evident that the only currency founders have is equity. And that equity is used to raise funds to grow. The more funds you raise, and the more you grow, the larger the equity gets, and that tends to reduce the interests of founders to well below any level of control.
To give you a sense, Vijay Shekhar Sharma held a little under 15 percent in Paytm, Zomato’s Deepinder Goyal owns under 5 percent and the OLA founders own less than 10 percent of their company. So clearly, while these entrepreneurs have managed to build ventures of scale, they no longer exercise great control over their destiny.
This trend is visible in several established businesses too now, with private investors bringing in a big slice of equity to scale up. The resultant dilution of promoter stakes is shifting the scales on control.
Exits are here to stay
With private investors into companies, comes the phenomena of exits. Private investors typically put money into companies with a 3 to 7-year horizon, and many are structured as funds with defined wind-down dates. This compels a transfer of shares periodically to either other funds of the investor or to other private or strategic investors or to the public via the listing. The last route has just opened up for many venture capital and private money-backed companies, with the IPO market booming. And this seems to be causing some consternation among several investors, with the surge in listings via offers-for-sale.
Truth be told, the offer-for-sale by itself is neither a good nor a bad thing. Private investors will exit companies when they need to, only the route may differ. What investors need to assess is whether the price of sale leaves anything on the table for the future. Even founders may look to dilute some stake in public offers to reap rewards of their labour, remember the little equity they have is usually their only wealth. So if late private investors can book some gains, why not them? The more important question is: Is their commitment to the business diminished? That should guide the investment decision.
But coming back to the exit phenomena. What it promises to do, till there is an exit to a strategic investor, is keep the asset in play. So, the fortunes of such businesses could see changes every time ownership shifts to new hands. And that’s something shareholders need to come to terms with.
The regulatory drive
Regulators are cognizant of the evolving business environment and are adapting to the changes. Market regulator SEBI recently released a paper on revisiting the concept of “promoter” and suggested shifting to a “controlling interest” regime, given that in many companies those classified as promoters are no longer in control.
There’s also risk mitigation and the matter of control of large public institutions by a few. In this context, banking regulator RBI has stepped in to cap the tenures of Managing Directors, CEOs and Wholetime Directors of private banks at 15 years. The term cap is set at a lower 12 years for promoter CEOs. The central bank has also called for a 3-year cooling-off period without any association with the bank for a CEO before seeking reappointment.
The moves are clearly aimed at improving and strengthening the governance of private institutions after several instances of failure.
Rise of the professional
What a lot of the above developments are leading to, is the rise of the professional CEO. A CEO with some skin in the game (performance-linked equity) is emerging as the new driving force for India Inc. Large corporates with diversified shareholding are clearly finding the professional as a more acceptable driver of business than promoter CXOs. Private investors have mostly always rooted for a professional in the corner office, and now regulators too are driving a shift by rewriting governance norms. And there are also the shareholders, who are demanding higher accountability. The recent advisory by a proxy advisor against the appointment of Rama Kirloskar, the 31-year=old daughter of Chairman Sanjay Kirloskar to the board of Kirloskar Brothers is just an indication of how the sands are shifting.
Shareholders win
The winds of change on governance are causing quite a flutter in the top echelons, but these tidings are a positive development for minority shareholders, as long as we don’t move from one extreme to another. An environment that fosters entrepreneurship, while also ensuring high accountability promises a better and safer ride for shareholders.