Monthly Newsletter February 2015
Governance Watch
Monthly Newsletter
Shareholder Activism in India
The genesis of shareholder activism in India can be traced back to early 2010 when SEBI came up with a mandatory requirement for domestic mutual funds to disclose their voting policies as well as voting actions at their investee com- panies, on an annual basis. InGovern Research Services saw this as an oppor- tunity and started as India’s first proxy advisory services company in June 2010. A proxy advisory firm offers voting recommendations to institutional "Affirmative action must be rooted investors like mutual funds, insurance companies, foreign institutional inves- in the principles of justice and tors, private wealth management firms, etc. on shareholder meeting resolu- equality” - Nelson Mandela tions of their investee companies.
Inside this Issue: Indian institutional investors were initially concerned largely with non-routine
corporate actions such as M&As and company restructurings. When domestic Article: Shareholder Activ- mutual funds made voting disclosures for the first time in 2011, the data was ism in India telling that the funds were not actively engaged with companies on routine businesses such as director appointments, director remuneration, auditor ap- On Focus: Max India Ltd- pointments, equity and debt fundraisings, related party transactions, sale of Corporate Restructuring business assets, role of independent directors, director tenures, etc. On Focus: Adani Group - Corporate Restructuring The Akzo-Nobel and Sesa-Sterlite
About Us Although proxy advisory firms found many contentious issues in routine and
non-routine company proposals, the first case of institutional activism was evi- We are in the News! dent in the Akzo Nobel merger case in early 2012 and then in Sesa-Sterlite merger in mid-2012.
In the Akzo Nobel case, the Board proposed to merge three promoter-held unlisted entities with Akzo Nobel at seemingly high valuations. InGovern is- sued recommendations against the proposal based on which a few prominent domestic institutions voted against the merger. However, the merger went through as it received sufficient percentage of votes.
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Shareholder Activism in India (continued)
Similarly, the Boards of Sesa Goa and Sterlite India approved a merger of the two companies along with Ve- danta Aluminium Limited (VAL). Proxy firms highlighted the facts that VAL had heavily leveraged balance sheet and a number of human rights issues. Acting on it, many institutional investors voted against the merger, but like Akzo-Nobel, the proposal passed through getting sufficient votes.
The Indian Hotels and Jindal Steel
Tata Group owned Indian Hotels classified Mr. Shapoor Mistry as an independent director in its annual re- port of 2012. Such a classification was wrong since Mr. Mistry is from the family that has a major sharehold- ing in the Tata Sons and is the brother of Mr. Cyrus Mistry. Proxy firms recommended that investors raise this issue following which the company correctly classified him as a non-independent director in the annual report of 2013.
Jindal Steel and Power (JSPL) proposed a resolution in 2012 to hand over authority to its CMD to set the re- muneration of Executive Directors. Once again, due to activism by proxy firms and shareholders, the com- pany withdrew the proposal.
Tata Motors, United Spirits and Siemens
In 2014, Tata Motors’ proposal of payment of remuneration to two of its Executive Directors and the Manag- ing Director in event of inadequate profits was rejected by public shareholders. This was the first instance of a routine proposal by a prominent Indian company failing to approval by the shareholders.
Similarly, in late 2014, many proposals of United Spirits to enter into related party transactions with its pro- moter Diageo Plc and other related entities were rejected by its shareholders.
Siemens’ proposal for selling the metals technologies business to a 100% subsidiary of Siemens AG, the Ger- man parent company, was rejected by shareholders.
All the three companies have re-proposed their resolutions with enhanced disclosures and explanations that are more informative.
Activism by Foreign Investors
The proxy advisory firms and domestic investors were not the only ones to take a proactive stance on activ- ism; a few foreign investors too started taking keen interest in their Indian investee companies. In 2012, The Children’s Investment Fund (TCI), a UK based hedge fund with AUM of more than $5 billion, initiated a le- gal action against Coal India’s directors and the Govt. of India over under pricing of coal resulting in lesser
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Shareholder Activism in India (continued) profits by Coal India. TCI, at that time, held 1% of Coal India’s shares which accounted for 10% of the total outstanding shares held by the public.
In 2014, Knight Assets, another UK based fund, engaged with Tata Motors to list the A-shares in the Ameri- can bourses. The investor believed the DVRs were undervalued in Indian markets and listing in US could enhance shareholder value.
What has aided shareholder activism
Shareholder activism can only take shape in an environment where the regulators demand that minority shareholder interests be protected. The new Companies Act 2013, subsequent revisions to Clause 49 of the Listing Agreement and other regulatory changes by SEBI have ushered in many changes that enhance the corporate governance landscape in India. The requirements for greater degree of disclosures by companies aided shareholders to analyze particular actions and make better-informed decisions. E-voting was made mandatory in 2013 which resulted in greater investor participation as it made voting process painless and independent of the location of the investor. Provisions like class action suits against companies and directors, which are in the offing, can also give minority investors the confidence to raise voice against companies whenever the need arises. However, some of the recent changes proposed in the Companies Act can be con- sidered as dilution of minority rights.
The road ahead
Indian companies need to give due importance to minority investors and realize that shareholder activism is here to stay. More institutional investors, including the public sector institutional investors, should engage actively with companies on routine and non-routine proposals. Regulators need to create an environment that fosters greater activism that ensures efficient management of companies and increased capital productiv- ity in India.
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On Focus: Max India Ltd - Corporate Restructuring
The Board, at its meeting held on January 27th 2015, approved a corporate restructuring plan to split the com- pany into 3 separate listed companies with 3 separate business verticals, viz. Life Insurance, Health & Allied businesses and Manufacturing Industries.
The company will be split into 3 listed entities – Max Financial Services Ltd. with the insurance business, Max India Ltd. with the health and allied businesses, and Max Ventures and Industries Ltd. with the special- ity packaging films business.
THE DEMERGER
The demerger is explained graphically below:
Max India Ltd (Insurance, Health & Allied biz., Speciality Packaging films)
Max Financial Ser- Max India Ltd Max Ventures and vices Ltd (Health & Allied biz.) Industries Ltd (Insurance) (Packaging films)
The original entity - Max India, which will be renamed as Max Financial Services Ltd., will focus solely on the group’s flagship insurance activity, through its 72.1% holding in Max Life. It will be the first Indian listed company exclusively focused on life insurance.
The second entity, named as Max India Ltd., will continue to manage investments health and allied busi- nesses comprising Max Healthcare, Max Bupa, Antara Senior Living and a Corporate Management Services team. The Corporate Management Services team will manage a shared services centre which will provide functional support to all the 3 entities.
The third entity will be named Max Ventures and Industries Ltd. and will house the investment activity in the group’s manufacturing subsidiary Max Speciality Films handling the speciality packaging films business.
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On Focus: Max India Ltd - Corporate Restructuring (continued)
CONSIDERATION
As a result of the demerger, Max India’s shareholders will retain 1 equity share of Rs. 2 in Max Financial Ser- vices Ltd. and will additionally get one equity share of Rs. 2 each of Max India Ltd. and 1 equity share of Rs. 10 of Max Ventures and Industries Ltd. for every 5 shares held in Max Financial Services Ltd.
The share allotment is explained graphically below:
Max India Ltd 5 equity shares of Rs. 2 each
Max Financial Ser- Max India Ltd Max Ventures and 5 equity shares of Rs. 2 vices Ltd Industries Ltd 5 equity shares of Rs. 2 each 1 equity share of Rs. 10 each each
As evident, the shareholding pattern (in percentage terms) will be same for all the 3 entities. A shareholder currently holding x% in Max India Ltd. will continue to hold the same percentage of shares in the 3 resulting entities.
As of December 31st 2014, the promoters of Max India hold 40.48% stake while the public shareholders own the rest 59.52% stake in the company. This proportion of stake will be maintained in all the 3 resulting enti- ties.
CASH DISTRIBUTION
Max India had cash reserves of Rs. 605 crores as of December 31st 2014. The Board proposes to split this re- serve among the 3 entities in such a way that Max Financial Services Ltd. will hold Rs, 150 Crore, Max Ven- tures and Industries Ltd. will hold Rs. 10 Crore and the balance ~Rs. 400 Crore will be held by newly formed Max India Ltd.
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On Focus: Max India Ltd - Corporate Restructuring (continued)
OTHER CORPORATE ACTIONS
The company has also initiated an action for the sale of its entire 100% stake in the clinical research business – Max Neeman entities in India and US to JSS Medical Research Inc., a Canadian Contract Research Organisa- tion, for US$ 1.5 Million.
LEADERSHIP & SENIOR MANAGEMENT CHANGES
There will be no change in the leadership as well as in the senior management of the entities. Analjit Singh (Chairman), Rahul Khosla (MD) and Mohit Talwar (Deputy MD) will continue to hold appropriate roles in the demerged entities of the Max Group. The top leadership of the individual businesses will continue in their roles post demerger.
VOLUNTARY OPEN OFFER BY PROMOTERS
The promoter, Analjit Singh has also informed the Board of his intention to make a voluntary open offer for buying up to an additional 34.5% stake in Max Ventures and Industries Ltd. which would take his aggregate shareholding to a maximum of 75%.
MANAGEMENT’S RATIONALE OF THE DEMERGER
As per the Chairman, the demerger will provide choices to an investor to either stay associated with all the businesses of the group or specifically invest in the businesses that the investor wants.
INGOVERN OPINION
The rationale behind the demerger is to unlock value of the individual businesses while also offering share- holders a choice of either staying invested in all the three businesses or in selected ones. The demerger may also benefit shareholders in way of higher dividend payment by profit making entities and tax savings from capital intensive and loss making divisions.
Although the scheme of arrangement is yet to be made available to the public, as per information available in the press release by the company, the corporate restructuring by Max India seems to be fair and not likely have any concerns.
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On Focus: Adani Group - Corporate Restructuring
The Board of Adani Enterprises Ltd, through their meeting on January 30, 2015 approved a group wide re- structuring involving Adani Enterprises Ltd. (AEL), Adani Ports & SEZ Ltd. (APSEZ) and Adani Power Ltd. (APL).
The scheme encapsulates demerger of port undertaking of AEL into APSEZ and power undertaking of AEL into APL. It also involves demerger of the transmission undertaking of AEL into a wholly owned subsidiary – Adani Transmissions Ltd. (ATL). Post the demerger, ATL is proposed to be listed on the stock exchanges. Further, Adani Mining Pvt. Ltd. (AMPL) – a wholly owned subsidiary of AEL will be merged into AEL.
Demerger of Ports business (Belekeri Port & 75% stake of AEL in APSEZ) of AEL, into APSEZ Demerger of Power business (40MW solar power project at Bitta, Kutch & 75% stake of AEL in APL) of AEL, into APL Demerger of Transmission Line business (Mundra-Zedra transmission line & 100% stake of AEL in ATL) of AEL, into ATL. ATL is a wholly owned subsidiary of AEL which will be listed on the stock exchanges post demerger Merger of AMPL (wholly owned subsidiary of AEL) into AEL
Graphical Representation of the Restructuring
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On Focus: Adani Group - Corporate Restructuring (continued)
The restructuring will result in 4 separate listed entities with Adani Enterprises’ stake in Adani Ports and Adani Power cancelling out to create direct ownership of the Adani Group promoters and public sharehold- ers of Adani Enterprises. Adani Group promoters will have 75% stakes in Adani Enterprises and Adani Transmissions and ~56% stakes in Adani Ports and Adani Power.
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On Focus: Adani Group - Corporate Restructuring (continued)
Consideration
The consideration will be in form of share-exchange where shareholders of AEL will be allotted shares in APSEZ, APL and ATL in the following manner:
Due to demerger of port business of AEL into APSEZ, APSEZ will issue and allot 14,123 equity shares to AEL shareholders for every 10,000 shares held by them in AEL. Due to demerger of power business of AEL into APL, APL will issue and allot 18,596 equity shares to AEL shareholders for every 10,000 shares held by them in AEL. Due to demerger of transmissions line business of AEL into ATL, ATL will issue and allot one equity share to AEL shareholders for each share held by them in AEL.
Pre- and Post-demerger Shareholding of AEL, APSEZ & APL
Pre-demerger Shareholding Post-demerger Shareholding
# of Shares % # of Shares %
Adani Enterprises (AEL)
Promoter – Adani Family 824,857,559 75.04 Promoter – Adani Family 824,857,559 75.04 Public 274,431,579 24.96 Public 274,431,579 24.96 Total 1,099,289,138 100.00 Total 1,099,289,138 100.00 Adani Ports & SEZ Promoter - AEL 1,552,538,715 75.00 Promoter – Adani Family 1,164,946,331 56.28 Public – Existing 517,512,615 25.00 Public – Existing 387,579,719 18.72 Public of AEL - - Public of AEL 517,512,615 25.00 Total 2,070,051,330 100.00 Total 2,070,038,665 100.00 Adani Power Promoter - AEL 2,153,935,082 75.00 Promoter – Adani Family 1,533,905,117 55.53 Public – Existing 717,976,080 25.00 Public – Existing 510,332,964 18.48 Public of AEL - - Public of AEL 717,976,080 25.99 Total 2,871,911,162 100.00 Total 2,762,214,161 100.00
(The pre-and post-demerger shareholding is calculated by InGovern)
The demerger makes the group’s structure and businesses simpler by demerging the related businesses of AEL into respective group companies. The share-exchange ratio although seems fair, needs more detailed analysis. Any restructuring that simplifies the business structure of the Group or the Company is a positive step and should be welcomed by the shareholders.
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About Us
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InGovern in Reuters on SEBI’s restrictions on Wilful Defaulters - Link to the Article
InGovern in Business Standard on Buyout of Minority Stake by Wipro Enterprises - Link to the Article
InGovern in Business Standard on on Buyout of Minority Stake by Wipro Enterprises - Link to the Article
InGovern in Mint on Tata Motors’ Proposals for Pay of its Executive Directors - Link to the Article
InGovern in Financial Chronicle on Shareholder Activism—Link to the Article
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