Housing Development Finance Corporation (HDFC), the largest housing finance company, on Tuesday questioned proxy firm’s advice to pension funds to vote against a resolution which sought to extend the appointment of Deepak Parekh as a non-executive director of the corporation beyond October 2019.
In an interview to CNBC-TV18, vice chairman and chief executive officer, said that proxy firms advice without applying their own mind or their own rationale on whether they should vote for or vote against the resolution.
Watch: Deepak Parekh to remain as HDFC chairman: Don’t know how many funds voted against him, says Keki Mistry
Mistry said stage-III loans are under watch for past 5-7 years and was the same in percentage terms five years ago.
Edited excerpts: The stock has been down about three percent since the numbers were announced and what is troubling people is that stage-III assets that you have identified indicating that they are standard, but they are stressed and that number has gone up to three percent in the March quarter. Although it has come down a bit now, it is worrying people. What is your sense? Is stress build up somewhere?
You had looked at this number five years ago also. You had a number which would not have been very different from what it is now in percentage terms. We have always been extremely conservative with our provisioning, extremely extraordinarily conservative. You will recall that last year, when we sold shares in HDFC Life and when we sold shares earlier in HDFC ERGO in the sense, when ERGO bought shares from us, 30 percent of the profits that we had made we transferred it into a provision account. So we have been extremely conservative with provisioning and try to find reasons to, even if there is a slightest stress on an account, we put it as an account to watch for. This is the way accounts have been build up over the last many years. So, it is not that the stress has been created today. These are loans, which are under watch and have been under watch for the last five-six-seven years. They are not non-performing loans (NPLs). I do not believe these are going to turn into NPLs but these are just accounts that we watch.
Technically, we do not even need to disclose as IIIA – that category that we have put because these are not NPLs. These are performing loans, these are standard loans, but it’s just that because we for our internal management purposes, we watch these accounts carefully. We created a new category called IIIA, but I repeat that even if five years ago, if we had done something similar, you would have had a similar kind of a proportion that time.
Have you provided for it completely or you provide for 28 percent?
We provide different percentages depending on each account. So that is why the provisioning amount is so high. If you see provisioning, we actually had to reverse in this account. Under our original accounting, the way accounting was done in the original generally accepted accounting principles (GAAP) last year, we could make provisions in a much more liberal manner compared to what we can do under Indian Accounting Standards (Ind AS) and therefore, the absolute amount of provisioning has got reversed in the opening balance, because we could not justify such high provisioning. So, wherever we could provide, we provided the maximum possible extent.
We also wanted to ask you about rather unexpected development of one fund voting against Deepak Parekh. Did the fund give any reasons for this?
None whatsoever. We don’t know whether it’s one fund or two funds or three funds. We have absolutely no idea. All we know is that the e-voting takes place and based on that e-voting, we get the numbers at the end of the year. We do not know who has voted for, who has voted against. We have no idea.
Have they given any reasons?
No one. They are proxy advisors and have their advisory reports and there are number of these kinds of proxy advisory reports.
The proxy report that have advised that they vote against. What have these proxy report said? Is it that Deepak Parekh has been there for long or is it that he holds……
There are different things. One proxy firm will say that he has been there on the board for long. So this not necessarily for Deepak Parekh. It could be for anyone that has been on board for long time or he is on too many boards. So, those are the kind of questions which people raise.
Is that the reason why Bansi Mehta and Bimal Jalan resigned from the board?
No. We had undertaken a refreshment of the board some time back. A year before last, we had a couple of directors who left. Last year, we had two or three directors who left and Bansi Mehta and Bimal Jalan had decided earlier that they were going to leave the board. They attended the board meeting yesterday and after that they have resigned. So it’s something which we had undertaken two years to refresh the board in a staged manner, because people have been there for a long time.
Are other investors worried. There will be a lot of people who are holding the HDFC share because Deepak Parekh is there. Were some investors worried that there are others who are voting against. Did this come up at all in your conversation with other investors?
There are few investors I have spoken to. But no one talked about the voting. No one.
On a more general principle, today we had Nilesh Shah of Kotak AMC speak with us and he was pretty worried about this development. He said FIIs hold a large stake in many big and very good Indian companies and one doesn’t know which proxy advisor they will follow these funds, is this a new source of instability for companies held by foreign funds?
I think more than companies held by foreign funds for someone like HDFC or for that matter, someone like ICICI or any of these companies, which are 100 percent held by the public and they don’t have a promoter shareholder, there is always that element of risk, which is there. If you have a promoter owned company, then 10-40 percent is owned by a promoter, who will naturally vote in favour of resolutions. So, the widely held company, someone like HDFC or ICICI would be open to this kind of thing.
The Uday Kotak committee also refers to the fact that for good governance, people should not stay on board for too long or there should not be one member with a membership in too many boards, so this has also become an Indian preoccupation after the Uday Kotak Committee. Do you think this can become more widespread with more people, asking board members to be changed off now?
I would think that at some point of time, over a period of 10 years or so, there is a need to refresh the board. So that is something which most companies, to my mind, will actively pursue.
You had a conversation with Parekh, what are his thoughts on this, how is he viewing this development at the annual general meeting (AGM)?
Development at the AGM in the sense that 77-79 percent of the shareholders have voted in favour.
The other 22 odd percent?
We don’t know who those 22 percent are. We have no idea.
What are Parekh’s thoughts? That is something which other investors of HDFC will want to know and other investors of the entire HDFC group will want to know, you have a huge large market capitalisation if you count all your listed companies together, I think it will be the largest conglomerate in terms of market capitalisation. They would all want to know will he continue.
Of course, he will continue, absolutely he will continue, 100 percent he will continue, why he should not continue.
How has he viewed this vote coming from 22 percent of the shareholders?
What happens is - to my mind, what happens is some of these funds, particularly pension funds, blindly follow what the proxy firms advise without applying their own mind or their own rationale on whether they should vote for or vote against the resolution. So, if a particular proxy advisor who they follow has advised that they vote against, they just go and blindly vote against. What one has to do is try and talk to these proxy advisors overtime, make them understand the Indian culture, make them understand the way things happen in India.
Is this an Indian proxy advisor or a foreign, whom do these funds normally listen to?
I would say most of them follow the foreign funds. To my mind, most of them follow one or two of these foreign proxy advisors.
After you have investor calls, media calls, you will also have a proxy advisory call after your results?
We have never done that, no one has done that to my mind, because these proxy advisors provide advice based on public information. They don’t do one-on-one meetings with company. That is what I have been given to understand, but we will try and understand little more of how they work and stuff like that.Important for you to understand once again and let me repeat that the stage-IIIA provisioning or IIIA categorisation that we have done for loans is just being extraordinarily conservative. Most companies would have put that as part of stage-I or stage-II.