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The Best & Worst Of Proxy Season 2014!

Published on Sat, Aug 16,2014 | 12:00, Updated at Mon, Aug 18 at 18:36Source : CNBC-TV18 |   Watch Video :

Brand royalty payments to promoter companies, last minute ESOP grants, unacceptable pay hikes to management, removal of independent directors – this proxy season has seen it all. But the evidence says more and more shareholders are standing up to company proposals, voting against them and making their voices heard. The poster story of the year is how institutional shareholder opposition forced Maruti to rework its Gujarat plant plans. On The Firm this week - the good, bad and ugly of proxy season 2014 – through the eyes of India’s 3 proxy advisory firms – Amit Tandon of IiAS, JN Gupta of SES and Shriram Subramanian of InGovern in conversation with CNBC-TV18’s Menaka Doshi.
Doshi: The headline story this proxy season was a resolution by Tata Motors to pay excess compensation to three Executive Directors in the face of inadequate profits. Two of the three Indian proxy advisory firms recommended that shareholders support the resolution. SES and global proxy firm ISS advised shareholders to vote against it.  Last month Tata Motors failed to get 75 percent shareholder approval, sending shock waves across India Inc. Never before has such a proposal been turned down.

Best & Worst Of Proxy Season
Tata Motors

Increase in pay of 3 Executive Directors in the face of inadequate profits

IiAS: FOR                             SES: AGAINST

Public Vote
Yes: 70.07%                          No: 29.93%

Gupta: I would say it is a beginning of the victory of shareholder’s voice being heard and in this particular case it very clearly demonstrates that you maybe a big company but if you bring something to the shareholders where the shareholder feels little uncomfortable, then they are ready to take the company to task that this is not correct. In Tata Motors, this is precisely what happened where the resolution was clubbed with two to three points - appointment, increase in salary and payment of the past remuneration. As a policy we always say that each item should be voted separately and taken a decision. Here there were many issues clubbed together and that is why we suggested a negative vote.
Doshi: That is not the only reason you had; you were also opposed to the increase in remuneration?
Gupta: Yes we said that this is a company which is not making profit; on consolidated basis- yes, the profit is there but salary is based on standalone profits and so we opposed it.

SES On Tata Motors’ Proposal Of Increase In Pay of 3 EDs
Commissions & bonuses have been included in minimum remuneration. The Company has made inadequate profit & remuneration paid in past is outside limits prescribed by the Companies Act, 2013

Tandon: We voted in favor of the proposal and we had a slightly different view. One is the fact that the persons you were talking to are all professionals and that is a big and important reason because if you are getting in professionals, you need to employ the best in the market and you need to pay them well.

The second thing is the business - we have taken a view let us look at the consolidated numbers rather than look at the standalone numbers. Then if you look at the consolidated numbers, you see a company with a turnover of about Rs 2400 billion as against that when you look at the compensation – for at least two of the three, we were talking about Rs 30 million or thereabout. You are not really been able to look at it in any meaningful sense of the word. We felt that look if you just looking at it very narrowly saying that the company has made an operating loss and not looked at the big picture - the fact that they are present in about 20 geographies - we felt you are losing the sight of the woods for the tree and therefore it make sense for us to support and vote for the resolution.
Gupta: I don’t think so because it is very important where we have objected was that a minimum remuneration cannot include a variable pay because performance base or incentive pay cannot be minimum remuneration. Minimum remuneration is minimum and if you have got any incentive pay it has to be related to the performance of the company.
Doshi: Was this a victory for minority shareholders, given that we did have SES say don’t vote for this or vote against this or was this a loss for minority shareholders because in a sense - not be able to pay the caliber of professional management that a company wants to be able to retain?
Subramanian: It really did shake up corporate India because companies have to explain to shareholders before placing in front of shareholders any proposal for that matter. Companies have thought that if we do capital restructuring or we acquire something, we need to put out explanation - that has happened in the past couple of years with Ambuja Cements, Maruti Suzuki etc. Now this has shaken up companies today that we have to explain shareholders even routine proposals and we cannot take shareholders approval for granted.
Tandon: Let me say that notwithstanding our recommendations, this has been the first and it is certainly not the last.
Doshi: This season companies decided to show some loyalty by paying royalty to their promoter companies. Two JSW group companies proposed that Rs 150 crore be paid in brand and license fees to a promoter company JSW Investment. That promoter company is owned by Sangita Jindal - wife of Sajjan Jindal - the company’s Managing Director. Though all three proxy advisory firms recommended a negative vote, shareholders approved the resolution. Havells India too proposed an annual brand royalty payment of Rs 40 crore to promoter entities, SES and IiAS opposed this one as well. The proposal succeeded but with a slim margin as 23% of public shareholders voted against it. First up JSW Steel?

Best & Worst Of Proxy Season
JSW Energy

Annual royalty to promoter company for use of ‘JSW’ brand

IiAS: AGAINST                    SES: AGAINST

Public Vote
Yes: 11.16%                          No: 2.25%

Best & Worst Of Proxy Season
JSW Steel

Annual royalty to promoter company for use of ‘JSW’ brand

IiAS: AGAINST                    SES: AGAINST

Public Vote
Yes: 94.66%                          No: 5.34%

Best & Worst Of Proxy Season
Havells India

Payment of Rs 40 cr/yr to promoter entities as royalty & trademark charges for the use of the ‘Havells’ brand

IiAS: AGAINST                     

Public Vote
Yes: 76.88%             No: 23.12%
Gupta: JSW Steel - our position is very simple that from where JSW Steel brand was created. JSW Steel started as originally as a company Jindal Vijaynagar Steel and Jindal Iron and Steel and all these companies right from day one had the support of public shareholder and public financial institutions and the promoters and others.

Doshi: You are saying basically the companies who are paying this brand royalty are themselves the companies that have helped develop this brand. So why should they be paying a brand royalty at all?
Gupta: From where Mrs Sangita Jindal could be the owner of that brand; she might not have been in the picture when the company started.
Tandon: Just look at the products they are making. They are making steel which is a commodity; the other is an energy company selling power which is a commodity. So it really doesn’t make any sense to brand something like that.
Doshi: They are also in branded steel to some extent - steel products.
Tandon: If you were to look at branded steel and you look at the margins and compare it with something like Tata Steel. Tata Steel operates at a 30 percent margin and JSW Steel is operating at 19 percent margin.
Doshi: Tata Steel also pays a royalty for using the Tata brand; a fee rather as opposed to royalty.
Tandon: We can come to that brand separately. At the end of the day, there are certain attributes which go with the brand. The brand is actually valued at about USD 21 billion globally- The Tata brand. Let us say if Tata decides to enter South Africa, they will recognize the brand and they will welcome them to a large extent.
Doshi: You are saying JSW Steel does not enjoy the same kind of brand premium?
Tandon: We don’t believe it has the same value and we come back to one is the absolute amount which is being paid and what is the kind of service and what is the kind of brand pull which is there on account of the brand.
Doshi: Despite all the opposition shareholders have supported this decision to pay royalty- both at JSW Energy and at JSW Steel- in a sense they seem to be in favor of the brand royalty payment.
Tandon: You need to remember that there was a clarification which the Ministry of Corporate Affairs had issued on 17th July which enabled a lot more of the promoter controlled companies to vote on the resolution.

17th July’14: MCA clarified that only Related Party connected to the transaction cannot vote
Doshi: The point you making is the only promoter company that could not vote on the resolution as an interested party is Sangita Jindal; what about the rest of them?
Tandon: The rest of them would have voted and supported the resolution.
Doshi: Even if they have not voted, even if you take them out of the picture, which was the case with JSW Energy - where they abstained from voting- even then non-promoter shareholders backed the proposal?
Gupta: You will have to go behind who are these shareholders. In JSW Steel one of the shareholders JFE Steel which is the collaborator of the Jindal Steel. You would obviously not expect the collaborator to oppose the resolution. Then you have to see the Foreign Institutional Investor (FII) and domestic institution’s shareholding. When I analyzed this, I feel that mutual funds have voted against the proposal but one of the biggest shareholders – LIC- has not voted.
Doshi: We had a similar issue with Havells India - yet again another annual brand royalty payment to the promoters. This one was clubbed with the transfer of the brand at zero cost in the year 2016 to Havells India. So on the one hand, that is a noble thing to do but you are still paying royalty in the interim between now and then?

Tandon: You need to remember that the company has spent a huge amount of money and continues to spend a huge amount of money on advertising the Havells brand. If you look at the last four to five years, they have been spending about 3-3.5 percent in absolute amount - almost Rs 5 billion - on the brand. Therefore you have the company which is spending on the brand and then the royalty which is being paid to the sponsors or the promoters.

If you just dig a little bit deeper and then when you look at the fact that the brand is being transferred in 2016 and then read it with another resolution which has been proposed this time which is the salary, you will see that for the Chairman and for the Managing Director, there is an increase in commission by 0.25 percent each. While they are actually cutting out the 1% brand royalty fees, they are actually compensating a part of it by increasing the compensation, which they get as far as the salary is concerned.

Havells India
Proposal: Increase in commission to Qimat Gupta, CMD & Anil Gupta, JMD by 0.25%

Gupta: I call it perfect hedge. They are hedged.                                                   

Doshi: Let us get to the hottest topic every proxy season -appointment of Independent Directors except this time the heat is on Indiabulls Housing Finance for removing three Independent Directors on the basis of a proposal from an unnamed shareholder. The company in the midst of a promoter split said the removal was to induct greater professionalism on Board. SES and IiAS wondered why then those independent directors were appointed at all.

Best & Worst Of Proxy Season
Indiabulls Housing Finance

Removal of 3 Independent Directors

IiAS: FOR                    SES: AGAINST

Public Vote (Karan Khera & Aishwarya Katoch)
Yes: 96.45%                        No: 3.54%

Public Vote (Joginder Kataria)
Yes: 74.30%                       No: 25.69%

Gupta: None of us would know what is the performance of a Director on the Board because you are not a party to what happens inside the Board. Here the key question is this that imagine the promoters are distributing the assets of companies among themselves. Fine, there is no problem but how can you say that these three Independent Directors are part of that promoter group.

Doshi: I don’t think anybody has said that.

Gupta: They have not said but then when you are clubbing those three Independent Directors because I have no means to find out- out of the seven Independent Directors who are performing, who are not performing, nobody knows. So when you are picking on three Independent Directors, you are very clearly implying that those three Independent Directors are supposedly the associates of those two promoters who are going out. Our question is this - we have recommended that those Independent Directors should fight this out and say that this is an insult to them - how can they be linked to the promoters.

Doshi: That is your assumption. There is no clarification or explanations as to why the three of them are being asked to leave the Board or why they are leaving the Board.

Gupta: I agree; then the shareholder who has moved the resolution, how come he knows the performance of these three Independent Directors among seven Directors?

Doshi: Yes; some mysterious shareholder has moved this resolution to remove these three Independent Directors on the Board.

Gupta: Who is this mysterious shareholder? Is he part of any of the promoters or is he part of the Board, we do not know.

Tandon: Let me speculate a little bit. So what has happened is that the notice was filed on 13th of the month and the settlement was announced on 15th. So what seems is that maybe at that time there wasn’t any surety whether the settlement will take place or not and therefore the company had pushed forward.

Coming to the recommendation, our recommendation is voting ‘for’ the directors going. At that time when we were looking at this, we were a little intrigued. When there was a disagreement between the Ambanis and they split, at that time, they did not say that remove Anil Ambani from the Board. He just stepped down. So therefore, what we did was we pointed this out to investors and said that the company has stated that the Board restructuring is being done to induct greater professionalism and experience suggesting that the earlier Independent Directors did not possess these qualifications. If so, it raises questions on the basis of which these independent directors were appointed sin the first place. So we have supported the resolution but put a box there saying that the investors need to find out a little bit more about it.

IiAS On Removal Of IDs From Indiabulls’ Board
“The company has stated that the board restructuring is being done to induct greater professionalism and experience – suggesting that the earlier independent directors did not possess these qualifications. If so, it raises questions on the basis of appointing these independent directors in the first place.”

Doshi: If you are removing these Independent Directors in the interest of professionalism and a better Board, then are you saying that these three are not professional and not suited?

Tandon: The management has proposed it, as Mr Gupta said, we are sitting outside looking in; so we don’t know what is happening on the Board.

Doshi: I want to add one more thing to this conversation here. I am looking at the results of the shareholder vote and when it came to the removal of Karan Singh Khera, only 3.52 percent of the votes were against. When it came to the removal of Mr Aishwarya Katoch, only 3.54 percent were opposed to the removal. When it came to the removal of Mr Joginder Singh Kataria, 25.6 percent were opposed. In effect, the resolution passed for all three because far many more were in favor than those who opposed but even shareholders seem to be distinguishing between the three and saying, look, we don’t want to oppose the removal of these two but the third one - we might be opposed to that.

Tandon: That is between the promoters at that stage as they unravel the transaction. So we are sitting outside speculating.

Doshi: SES criticised ITC after it granted ESOPs to three independent directors just before the Companies Act 2013 received Presidential ascent. SES says the ESOPs grant violates the spirit of the new company law, which disallows ESOP remuneration to independent directors.

Best & Worst Of Proxy Season

Grant of ESOPs to Independent Directors after Companies Act was passed in Rajya Sabha

SES: AGAINST                    

‘Options were granted by the Board on 28th August 2013 and the same was communicated to Stock Exchanges on 23rd September, 2013. The Companies Act 2013 was passed on 8th August 2013 in Rajya Sabha and had become a law waiting to be promulgated. The act of allotting options to all board member before provisions of the Act were to kick may have been and attempt to beat an impending law.’

Gupta: Two companies have done it, Tech Mahindra and ITC. And we have said that the idea behind stopping ESOPs to Independent Directors is that it somehow vitiates their independence. You cannot say that independence will get vitiated only after one week when the law comes into effect. If the concept is there and the law was approved by the parliament and assented by the President, so it is waiting to be implemented. Ethically, the ESOPs should not have been allotted and that is why we have said, legally it is perfectly right but in the spirit of the law, it is not right.

Tandon: Our view is pretty much similar to what Mr Gupta has said that given the fact that it is almost as a part of law then the company should have been a little bit more circumspect about it.

Doshi: At Piramal it is the conflict of interest of Independent Directors that has the proxy firms worried. SES and IiAS opposed the appointment of Keki Dadiseth and Gautam Banerjee as they have relationships with Piramal’s statutory auditor PwC.

Best & Worst Of Proxy Season

Appointment of 2 Independent Directors who had a conflict of interest

IiAS: AGAINST                    SES: AGAINST

Public Vote  (Keki Dadiseth)
Yes: 99.84%                         No: 0.16%

Public Vote  (Gautam Banerjee)
Yes: 99.99%                        No: 0.01%

Tandon: One of the things is that you have someone who is part of the Board of the auditor and then you have got the same auditor. So one of the two is clearly conflicted - either as a director you are conflicted or as the auditor you are conflicted- and we kind of raised this issue saying that look we don't think it sits well with the company and therefore they should be stepping down.

Gupta: There are two directors who are associated with the auditor. One is member of the advisory board of India and he is a big name- we have nothing personal against the person- it is a question of ethics. In case of Dadiseth, we have said legally he may not be breaching the law but ethics-wise it is wrong to be on the board as an audit committee member as well as on the advisory board of the auditor.

Second about Gautam Banerjee, he was in fulltime employment of PwC Singapore.

Keki Dadiseth is a member of India Advisory Boards of PwC. PwC is the statutory auditor for Piramal
Gautam Banerjee was Executive Chairman, PwC Singapore for nine years before joining Piramal’s Board

Doshi: But it is PwC Singapore; not PwC India. So it is not really that much of a conflict position.

Gupta: It is not that much or this much; we do not evaluate that much or this much. The issue is PwC Singapore is the same network as PwC India or not? And our idea is that it is.  

Doshi: This one wins the title of the most aggressive proxy call this season. Iias recommended that share holders vote against Tulsi Tanti’s reappointment as Managing Director of Suzlon.  

Best & Worst Of Proxy Season

Tulsi Tanti’s reappointment as Managing Director

IiAS: AGAINST                    

Public Vote
Yes: 94.15%             No: 5.85%

Tandon: That is where the market is heading. So if you look at some of the statements emanating from RBI and the governor, he says that some of the managements don't have a divine right to be running their businesses. So therefore it is little bit consistent with the view which is there all around. If I go back last four-five years, every year we have been hearing this whole debate on Suzlon and how it is facing difficultly and how they are going to be turning the business around. Meanwhile what we find is that they have defaulted on the USD 200 million FCCB.

Doshi: But they have restructured those.

Tandon: They have restructured it but nonetheless it is not the same thing as being able to service it. The second is the fact that over a period of time the Rs 9000 crore of loans which have been restructured, the share price has kind of lost about 85 percent of its value over the last three years. So all around there has been a severe bruise into the financial system and to the shareholders.

Mr. Tanti might have been the right person to conceive and start the business but the right person to run it and given the fact that there is some financial difficulty, is he the right person to be able to turn it around? Equally importantly what we find is that his wealth is also tied up for the company. So therefore may be it is in his interest to bring in someone who is more suited to run the company.  

Doshi: Unfortunately whether it was the call to change the management altogether or the call to vote against the increase in remuneration, both those recommendations didn’t quite succeed because shareholders have supported both cases, hiking his salary from Rs 2 crore to Rs 3 crore as well as keeping him in management.

Tandon: It is a typical list of investors. If you look at it, I don't think mutual funds would own more than 1 percent of the equity. Most of it is again a consequence of the restructuring- so most of the banks have converted part of their loan into equity and have ended up holding it. They are not geared up for looking at these things and having just signed an agreement with the company to restructure, they may not have been quite open to the idea of making such a dramatic change.

Doshi: One proposal that hasn’t made it to shareholders is Cairn India’s decision to give USD 1.25 billion loan to a subsidiary of its affiliate Sesa Sterlite. Despite being a related party transaction, it took shelter under another section of the law and avoided a shareholder vote. But investors had their say and the stock fell on the news.

Best & Worst Of Proxy Season
Cairn India

July 23rd, 2014
- Announced its decision to give a $1.25 billion loan to a subsidiary of its affiliate Sesa Sterlite

No shareholder resolution required

July 24th, 2014
- Stock was down 6.67%

Gupta: I believe that Cairn India’s idea of giving loan is not to help the company Cairn India but to help the other company which is borrowing the money.

Tandon: It actually took everyone by surprise. There weren’t enough disclosures throughout the year and suddenly in the analyst call, they announced the fact that this is being done. One of the things you find is that companies are increasingly using subsidiaries to hide related party transactions; then who gives the approval? It is the shareholder who gives the approval for you’re dealing with related parties.

I think Sterlite as a group should have been a little bit more sensitive because this is not the first time shareholders have raised the issue as far as related party transactions are concerned or governance at that group is concerned.

Doshi: I want wrap-up comments from each one of you on what you make of how far we have come in this process that you all have started or this journey you all have started in enforcing better governance in companies.

Subramanian: Since 2010 it has been a journey, are we there yet? No, there is an increasing institutional shareholder activism so to say if you count the number of against votes. Retail investors also are now enabled to vote and be more active because e-voting takes out the cost to zero and so we believe this is just a start for India in some sense.

Doshi: What stood out for you in this proxy season?

Tandon: What we like is the fact that shareholders have started engaging with companies and equally importantly companies have started engaging with the proxy advisory firms. So it is something which is clearly moving center stage and if you were to look at what was happening in the previous years, there was some degree of indifference to what we were doing and suddenly there is a greater degree of engagement with what we are doing which I believe is positive for us and a positive development for the markets.  

Gupta: When we started, the companies asked who the hell are you? Now at least they call us, they want to clarify; that is first. Second the institutional shareholders participation has increased. Our clients do call us and discuss with us about the resolutions and our recommendations. Next phase will be increased participation by the retail investors. Then only the real democracy in the corporates would come.


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