INGOVERN RESEARCH SERVICES SEPTEMBER 2017 Governance Watch Volume - 2017:09

Interesting Shareholder Proposals

In our last month’s newsletter, we talked about proposals by Raymond and ITC which drew investor criticism. In this edition, we list few exam- Mailing Address: ples of proposals by shareholders (those who are not-in-control) in this 369, 9th Cross, 29th ongoing proxy season. It is to be noted that none of the proposals were Main, HSR Layout approved with requisite majority. Sector 1, Bangalore Supreme Tex Mart, on the requisition of a non-controlling promoter 560102 (who was the MD of the company till April 2013), called an EGM on 16th August. The requisitionist sought removal of the two promoter executive directors on the Board and appointment of himself as MD and two of his Contact: family members (wife and daughter) as directors. This is a case of in- (+91) 080 2258 2111 fighting between the promoters. While the proposals got defeated after receiving only 44% approval, the following days saw resignation of one of the promoter executive director and also a woman independent director from the Board. Reach us at: [email protected] Alembic received a proposal from a group of 1000+ small shareholders under a portfolio manager Unifi Capital. They sought appointment of a small shareholder director. The proposal was first of its kind in . The Visit us at: company rejected the request of these 1000+ shareholders stating rea- sons that didn't have any meaningful logic. However, this sets a precedent www.ingovern.com to the possibility of many such future proposals to appoint a small share- holder director.

MRO-TEK Realty, on the requisition of a public shareholder, called for a Postal Ballot where the requisitionist proposed his appointment to the Board as a non-executive director. He holds ~20% of the equity shares of the company. The proposal was defeated as it received 27.4% votes. Inside this issue:

Shareholder Proposals Our MD on ET Now on ET Now Discussion

Our Managing Director Mr. Shriram Subramanian took part in an ET Now Reforms needed in Indian discussion on the return of Mr. Nandan Nilekani to Infosys as its Non- Sports Associations executive Chairman. Small Shareholder Shriram emphasised that the questions over transparency and disclosure Directors at Infosys remains unanswered. He advised the Company to put out a comprehensive white paper addressing all the questions asked by the Opinion on SEBI Shell Companies directive Media Watch! stakeholders. He also stressed that this event shows that Infosys lacks a robust succession planning process. Proxy Season 2017 so far ... You can watch the video here. We are in News

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A Note on Small Shareholder Directors

On 19th July, Alembic Limited (“Alembic”), which is the holding company of Alembic Pharmaceuticals Lim- ited, notified the stock exchanges that one of its shareholder has proposed the name of another individual to be appointed as a ‘small shareholder’ under Section 151 of the Companies Act.

As per a media report in Times of India dated July 24, the proposal was being made by small shareholders to actively seek solutions for Alembic to address the issue of the heavy discount that the company’s shares have been trading in since a long period of time. Alembic owns about 30% of Alembic Pharmaceuti- Is a small cals which has a market capitalisation of Rs. 10,000 Crore. This stake alone should amount to a value of shareholder Rs. 3,000 Crore. However, the market capitalisation of Alembic, which has other businesses too, is only about Rs. 1,000 Crore. director a better option for public Section 151 empowers small shareholders to elect an individual as a small shareholder director on the Board of their listed company. A small shareholder is defined as a shareholder who holds shares in any than an company, the aggregate face values of which does not exceed Rs. 20,000. In order to make such a pro- independent posal, at-least 1,000 such small shareholders or 10% of the total small shareholders of the company, whichever is lesser, should come together and submit a notice to the company alongwith their signatures. director? The individual, if appointed, will be classified as an independent director and will serve for a term of three years. The director cannot be reappointed for a further term nor can be associated with the company for three years after his/ her term is over. The approval for his appointment must be sought through a postal ballot.

1. Small shareholder director vs Independent director

A small shareholder enjoys similar responsibilities and accountabilities as that of an independent director. It is easier for small shareholders to nominate and appoint a small shareholder director than an independ- ent director. The main difference lies in voting. While an independent director needs approval of a major- ity of all voting shareholders, including promoters, to get appointed, only small shareholders are allowed to vote on appointment of small shareholder directors. Other differences include: • A shareholder with one share can propose an individual as an independent director. Appointment of a small shareholder director requires a proposal by 1000 (or 10%) small shareholders • Independent Directors can be appointed for 2 terms of 5 years each, i.e., 10 years in total. Small shareholder directors can have only one term of 3 year. • Independent director can serve on the Board of up to 7 listed companies. A small shareholder director can serve as such in a maximum of 2 listed companies. Further these companies should not be competitors. • Small shareholder directors can’t be engaged in any capacity, directly or indirectly, with the com- pany for a period of 3 years after expiry of tenure. There is no such requirement for an independ- ent director.

2. Voting Process

As per Rule 22 of the Companies (Management and Administration) Rules, 2014, election of small share- holder directors can only be done through a postal ballot. The proposal for appointment will be through an ordinary resolution which means it requires a simple voting majority to sail the proposal through. Also, as the text of Section 151 indicates that the small shareholder director should be elected by small share- holders, it means only small shareholders are eligible to take part in the voting process.

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A Note on Small Shareholder Directors… (contd)

3. Potential deal-breakers

Voluntary appointment by company - As per Rule 7 of the Companies (Appointment and Qualification of Directors) Rules,2014, any company can opt to have a small shareholder director on their own. In such case, the requirements of small shareholders don’t need to be met as required. Since the company can have only one small shareholder director, the small shareholders of the company, which has already opted one such director on its own, cannot elect any further individual. Hence, they lose out on the opportunity to elect someone who truly represents them. There is no rationale provided as to why such a provision has been provided in this section/ rule.

Company’s Board may refuse to appoint - The word ‘may’ in the text of Section 151 leaves a confusion that it is completely in the discretion of the company whether or not to accept any such proposal from small shareholders. This effectively will defeat any kind of activism by small shareholders in case of a none- to-less co-operating Board. The Act also doesn’t specify under what condition can the company or its Board decline the request by small shareholders to nominate their representative.

Conclusion

Though the concept of small shareholder director is powerful and seems to be empowering the retail shareholders to have a say on Board matters, the provision to company to voluntarily appoint one and also the absence of any precedent in the Indian context puts a question mark on its effectiveness and practicality.

Reforms needed in Indian Sports Administration

Some of the key findings in InGovern’s report ‘Governance of Sports in India’ published in August 2016 were quoted in a report titled ‘Ten Reforms Indian Sports Administration Needs’ published in July 2017 by The Sports Law & Policy Centre. The foreword of this report was provided by Olympian Gold medal- Abysmal State of list Mr. Abhinav Bindra. Governance -

One of the reforms suggested in this report is to create an independent sports election commission. The Non-existent gender report quotes InGovern’s findings on how the process of election and term limits imposed on members of and ex-player sports associations in India are totally ineffective as their charter allows the President and executive coun- cil members to stay on the council as long as they want and till they are alive. representation and authority to existing Another key reform suggested in this report is to institutionalise athlete and gender representation across sports associations. It quotes InGovern’s findings on the abysmal state of gender and player representation members & on the executive council of these sports associations. InGovern had found that only one out of the 27 presidents to covered Indian sports associations, has a former national level sportsperson as its president. InGovern had also found out that while there are many sports associations which do not have any women representa- ‘serve ☺’ on the tion, almost all others have about 2% - 8% women representation on their councils. Boards/ Councils

The report published by The Sports Law & Policy Centre can be accessed from here. their entire lifetime

The report ‘Governance of Sports in India’ published by InGovern can be accessed from here.

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SEBI on Shell Companies - Non Transparent and Unfair

On August 7, 2017, the National Stock Exchange (NSE) and the (BSE) issued circulars notifying that SEBI has forwarded them a list of 331 ‘shell companies’ as identified by Ministry of Corporate Affairs (MCA) and advised them to take the following actions against the notified listed compa- nies:

1. Trading in all such listed securities to be placed in Stage VI of Graded Surveillance Measures with immediate effect. Trading in these securities will be permitted once in a month. 2. Stock exchanges to initiate the process of verifying the credentials/ fundamentals of such compa- nies by conducting an independent audit and forensic audit, if necessary. 3. In case the stock exchanges do not find appropriate credentials/ fundamentals, they will initiate proceedings for compulsory delisting of those companies. 4. The promoters and directors will not be allowed to transact in the securities of their companies, except for buying of the securities, until investigation by stock exchanges is completed. Also, the Has SEBI been shares held by them will not be allowed to be transferred by depositaries until investigation is completed. Fair & Transparent Stated below are the following facts/ concerns with the NSE and BSE circulars: with its letter to 1. Contrary to some media reports, it is not SEBI that has ‘banned’ trading in these companies. The letter clearly states that it is MCA which has forwarded SEBI the list of these 331 shell companies. SEBI, on its part, has just forwarded the list to the stock exchanges ‘advising’ them to do their Stock Exchanges? own independent investigations on the same. 2. It is unusual that SEBI has just forwarded the list to the stock exchanges without stating whether it has done its own investigation on the veracity of the claim made by MCA. In absence of any such information in the circular, which has SEBI’s letter to exchanges, it can also be assumed that SEBI has not done any investigation on its own. 3. The letter by SEBI does not disclose any rationale or justification on what basis MCA has classified these companies as ‘shell companies’. This has made matters confusing for stake-holders of the concerned companies, including their minority shareholders. The least that could have been done for transparency in communication was to disclose the criteria/ event on basis of which these companies were determined to be ‘shell companies’. 4. Some of the companies in the list includes names such as SQS India BFSI, J. Kumar Infraprojects, Parsvnath Developers, etc., which have operating businesses and revenues. It is not clear as to on what basis MCA has classified these companies as ‘shell companies’. By prohibiting regular trading, it is the minority shareholders of these companies that will be affected the most. 5. There is no separate circular(s) on the above notification by either SEBI or MCA. This has made matters more opaque and secretive than transparent. 6. It seems to appear that SEBI, through this letter, has committed what is known in statistics as Type-1 and Type-2 errors. Many companies that seems to be genuine have found their names on this list while there are many other suspect companies which are not at all mentioned here. 7. The biggest worry regarding this letter is that SEBI and MCA have not provided any scope for the companies to present their defence as to why they should not be classified as shell companies. The companies, their directors and shareholders have not been provided any channel(s) to be heard out in this case. This is unfair on the companies and especially on their minority sharehold- ers.

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SEBI on Shell Companies… (contd)

SEBI, as the regulatory body of listed entities in India, champions good corporate governance practices that includes transparency and fairness by the companies. However, in this case, SEBI itself has failed on both these fronts. By not disclosing the criteria of qualifying these 331 entities as ‘shell companies’ and by not stating whether it has done its own due-diligence/ investigations on these companies, it has failed to be transparent. Secondly, by advising exchanges to immediately restrict regular trading in the securities before even initiating an investigation, and by not providing any opportunity to the concerned companies to present their defence, SEBI has been unfair to these companies and their minority shareholders.

We sincerely hope SEBI to come up with a circular/ notification that provides full justification and greater disclosures on the issues.

(This article by InGovern was published in VCCircle and can be read here.)

The Proxy Season 2017 so far ...

There were 353 shareholder AGMs meetings scheduled in August Akzo Nobel whose meeting details were col- lected by InGovern. Colgate Titan Please write to us at [email protected] for These included 317 AGMs, 7 Godrej Ind. vote recommendations EGMs, 24 Postal Ballots and 5 Hind Zinc Others on any company. CCMs. L&T Reliance Ind. Lupin Some of the large companies that M&M held meetings during August are: MRF Ambuja Cem. Piramal Ent. PNB

We are in the News!

Economic Times: Shell Companies– SEBI should have explained logic of its action (Click here)

“In a chat with ET Now, says Shriram Subramanium of InGovern , says of course companies which have oper- ating businesses and which are making disclosures periodically and are compliant with the guidelines as well as minority shareholders are aggrieved”

Business Line: Advisory firms back Murthy’s stand on Panaya deal report (Click here)

“There is merit to what the founders are saying and enough reasons for Infosys shareholders to be worried, Subramanian said.”

India Today: A Bitter Suit (at Raymond) (Click here)

“Transfer of wealth to the next generation is a teething problem in corporate India. Unfortunately, many Indian promoters still consider company properties as their own." said Shriram

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