Governance Watch

Monthly Newsletter June 2014

Governance Watch

Monthly Newsletter

InGovern MD’s interview with ET on curbing Insider Trading

Rigorous enforcement is the need of the hour: Shriram Subramanian

Within days after India's largest drug maker Sun Pharma announced the ac- quisition of troubled drug firm Ranbaxy the market murmured about possible insider trading in the Ranbaxy stock days before the deal was announced. What started off, such a market rumour reached the doors of the Andhra Pradesh high court which stayed the deal on the basis of a petition filed by two retail investors. Sun Pharma however has denied all the charges and has moved the Supreme Court challenging the stay order, however this issue has "Ethics in business is extremely once again brings to light the issue of lax oversight by market regulators. important; your reputation is all you have in life”. - Freddie Laker Shriram Subramanian, Founder and Managing Director of Ingovern, a corporate governance advisory firm and also a member of CII's Insider trading com- Inside this Issue: mittee in an interview to ET speaks about the changes needed to plug the gaps.

InGovern MD interview Excerpts from the interview. with Economic Times on

curbing Insider Trading

Q-n-A with InGovern MD There have been questions raised about insider trading by some minority in- on Infosys Leadership vestors on the Sun-Ranbaxy deal, what is your view on it? Concerns The spurt in the stock price of Ranbaxy in the week prior to the transaction InGovern’s presence in announcement leads one to think that there is a definite possibility of insider national level seminars trading. This merits sou moto investigation by SEBI and the stock exchanges.

Q-n-A with InGovern MD on recently concluded Info- A court case in AP alleges that Sun's promoter and CFO Sudhir Valia might be sys AGM involved in insider trading, is our system lenient to allow such trading?

Meetings: June 2014 If indeed the promoters of the company are involved in insider trading, it would seem to be penny-wise and pound-foolish. SEBI and the stock ex- About Us changes should investigate which entities were involved in the trading of Ran- baxy shares in the week ahead of the transaction announcement. Our system is We are in the News! very lenient because there is no fear of enforcement amongst market participants, be it promoters, company executives, brokers, investment bankers, law- yers, consultants, regulators.

(Contd. on next page..) Monthly Newsletter

InGovern MD’s interview with ET on curbing Insider Trading (continued)

What do you think, should regulators do, to keep insider trading under check?

The regulator needs fight insider trading on 3 fronts (a) Enhance surveillance - this means more pressure on stock exchanges and market participants to develop systems and procedures for real time monitoring and flagging of unusual trading. (b) Rigorous and speedy enforcement - once there is suspicion - like in the Sun- Ranbaxy case, ensure speedy investigation and punishment. It is sad that many cases have taken over 10 years of investigation, and justice is yet to be done (c) Put the fear of punishment as a deterrent - SEBI needs to put insider trading as a high priority item and talk against it at all forums. The onus is not just on the regulator, but on all market participants to enhance and take measures to counter insider trading? SEBI needs to send a strong message to all market participants that they will rigorously pursue insider trading cases and the fines will be debilitating. This is the fear that firms and individuals should have.

Do you think there needs to be a special law that needs to be enacted to keep insider trading at bay?

Laws are already in place. New insider trading regulations are being implemented. Rigorous enforcement is the need of the hour.

How do other countries/regulators deal with insider trading? Can India take cue from them?

The US - sets the benchmark on insider trading where the regulator pursues cases rigorously. Market participants like investment banks, asset management firms, etc. - take the regulations seriously. The high profile convictions like Rajat Gupta's case ensure that there is fear that acts as a deterrent. India should learn from the US regulators.

This article was published in the Economic Times on May 19, 2014. The link to the article is here.

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Q-n-A with InGovern MD on Infosys’ Leadership Concerns

InGovern MD answered to queries of various journalists and media persons on the leadership concerns at Infosys Ltd. Listed below are some of the questions by reporters and their replies by InGovern.

Questions on Leadership and Board Changes

Q. Does a leadership model in which one founder succeeds another ever work?

A. In general, leadership should be based on competency and merit. At different stages of a corporation‘s evolution, different competencies are required. So, when a company is started and being built, the founders who started the company are well versed in leading the company. However, when the company achieves a stage of maturity and is large, it is not necessary that the founders are equipped to lead the company. So, unless all founders are competent, just one founder succeeding another never works. Also, if a company raises external funding and/or is listed, the Board of Directors has a duty to all the shareholders of selecting the most competent leader – irrespective of whether he/she is a founder or not – to lead the company.

Q. Infosys was considered an icon of corporate governance even while founder succeeded founder. Did crit- ics fail to blow the whistle?

A. Proxy advisory firms like InGovern and some investors and analysts did raise concern of founder succeeding founder without any emphasis on merit and competence. Some large investors did vote with their feet, selling their holdings, due to the non-performance of the company under some founders of Infosys.

Q. If a Board does not sack a non-performing CEO just because he is the cofounder, can it be considered to have failed in corporate governance?

A. The Board of Directors should have taken necessary measures when the founder was non-performing as the company failed to achieve even the average industry growth rate. It is definitely a failure on the part of the Board to proactively address the leadership issue. It was the collectively responsibility of the Board and it failed the shareholders.

Q. K. V. Kamat who was the earlier non-executive chairman of the Infosys Board stepped down as independ- ent director last year when N R Narayana Murthy came back as executive chairman. Kamat has now been elevated to his earlier position of non-executive chairman. In keeping with the norms of good corporate governance, should Infosys have got a new chairman?

A. It isn‘t necessary that Infosys get a new chairman. K.V.Kamat is held in high regard by investors and is considered capable and competent for the role of chairman.

(Contd. on next page..)

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Q-n-A with InGovern MD on Infosys’ Leadership Concerns (continued)

Q. What happens to the culture of an organization and the morale of the employees when the founders / top management compromise on their own rules? Murthy not only came back - he also brought his son as his executive assistant, despite always maintaining that family members of founders would not join the company?

A. It is likely that morale of employees in the company decreases. Also, employees may compromise on their own values knowing that the value system professed by the founders/senior management has been compro- mised. Also, it is likely that some members of the Board who were opposed to the induction of Rohan Murty into the Chairman‘s office also demit office. This seems to be case with Ann Fudge.

Q. As an outsider, what extra leadership capabilities does a new CEO need to bring to the fore to hold the company together and also prevent more senior level exits?

A. The new CEO needs to energize the senior management team towards a common goal which would be a shared vision for senior management. This would prevent senior level exits while also enhancing morale across the organization. The common goal could be as simple as (a) to re-achieve the 2nd place in the Indian IT services industry (b) achieve the highest growth rate in the industry.

Q. Has Murthy done the right thing by leaving now and giving the new CEO the freedom to chart the course for the company. Did Murthy have a choice but to leave? Would an external CEO have agreed to join if Murthy had continued?

A. The role of the founders had become untenable with the induction of a professional non-founder CEO and Managing Director. It is unlikely a non-founder CEO would have agreed to join if Mr. Murthy had continued for an indefinite period as it would likely have defeated the purpose of having a CEO lead the company into the future.

Q. What lessons can one learn from the leadership crisis at Infosys?

A. Board of Directors should take a proactive role in leadership and succession planning, and not wait for a crisis to precipitate issues. There was ample time for the Board to plan and work towards an organized succession planning. Also, the fact that Infosys had to eventually seek to hire an external candidate for the role of CEO indicates that the investments made by Infosys in the past for leadership grooming seem to have gone waste. The company needs to redouble its efforts to have a strong second tier leadership who are capable of stepping up as a CEO even at a moment‘s notice.

Additionally, the company should make greater investments in hiring star potential candidates even at SVP and unit head levels, and also make investments in training its SVPs so that they can be groomed to be potential CEOs.

(Contd. on next page..) Page 4 Monthly Newsletter

Q-n-A with InGovern MD on Infosys’ Leadership Concerns (continued)

Also, any succession planning exercise should be a discreet process. The company has made the CEO hunt process a very laboured one than it should have been. There was no compulsion to make the announcement on April 11, 2014 of conducting a search process for Mr. Shibulal‘s successor, and the appointment of 2 advisory firms (DDI and EZ) to evaluate candidates. Discretion was needed in the search process, and this announcement just unnerved potential candidates and investors. Rather the company should have selected the successor CEO and then made an announcement.

Q. Infosys has always prided itself on its leadership development capabilities and its Leadership Institute. In the light of the leadership crisis at Infosys, has that been a failure?

A. Yes, the investments made by Infosys seem to be largely in developing junior and mid-management cad- res. The investments don‘t seem to have prepared the company for a leadership crisis at senior managerial levels. Infosys should articulate a genuine leadership development program. Aspects of leadership development like job rotation, mentoring, accelerated career development programs, external trainings, etc. should be part of the program.

Q. Anything else you would like to add.

A. The company needs to strive to connect with clients and also strive to become an employer of choice.

Questions on Investors Concerns on CEO Succession Planning

Some of the queries were also regarding various investors‘ concerns on the ‗succession planning‘ procedure at Infosys.

Q. You had spoken of how some top institutional investors had raised concerns over the ongoing CEO succession planning at Infosys. Could you detail what their concerns were?

A. The immediate concern is that of CEO selection. The departure of several potential candidates especially during the selection process is a concern. The broader concerns relate to leadership development and succession planning. On whether the investments made by Infosys in leadership development need to be relooked, so that in future there is a strong second tier leadership. In addition, there are concerns about the role of the promoters in future, would they continue to have executive or non-executive roles?

Q. If possible could you share the names of the investors?

A. No, but there are a few FIIs and one large Indian institutional investor who have raised these concerns.

(Contd. on next page..) Page 5 Monthly Newsletter

Q-n-A with InGovern MD on Infosys’ Leadership Concerns (continued)

Q. What is InGovern‘s response to these investors?

A. We advice that investors should demand that management bring a quick closure to the CEO selection process, and the current anxiety amongst all stakeholders be put to rest. The company should also articulate a plan on how future leaders will be developed. We advice that investors seek clarity on the role of the other 2 executive promoters (executive chairman and executive VC) post the appointment of a CEO who replaces Mr. Shibulal.

Q. What is your personal take on the ongoing CEO hunt at Infosys and the way the current management is carrying out the process?

A. The company has made the CEO hunt process a very laboured one than it should have been. There was no compulsion to make the announcement on April 11, 2014 of conducting a search process for Mr. Shibulal‘s successor, and the appointment of 2 advisory firms (DDI and EZ) to evaluate candidates. Discretion was needed in the search process, and this announcement just unnerved potential candidates and investors. Rather the company should have selected the successor CEO and then made an announcement.

Q. Have some investors raised concerns over the entire second generation of leadership having quit and there being a leadership vacuum in the company?

A. There is obviously some concern, but, the larger concern is that of investments made by the company in leadership development.

The larger concern is also that of demonstrating dynamism by the leadership. The concern is whether the current second generation of leadership can demonstrate new and bold thinking. The other concern is whether the promoters would be able to let go of executive and non-executive roles within the company, and remain mere shareholders.

Q. What is your take on this?

A. I think many of the second generation of leaders within Infosys have been rewarded for loyalty to the company and for being YES men. For this to change, I believe that Infosys should articulate a genuine leadership development program. Aspects of leadership development like job rotation, mentoring, accelerated career development programs, external trainings, etc. should be part of the program. Why cannot Infosys hire external candidates at SVP levels?

(Contd. on next page..) Page 6 Monthly Newsletter

Q-n-A with InGovern MD on Infosys’ Leadership Concerns (continued)

I believe that the time has come for the promoters to repose faith in a CEO and the Board. The promoters should opt out of executive and non-executive roles (not even as members of the Board), and remain mere shareholders. Such a step would be bold, but, will at least make the company a truly widely-held company with no promoter on its Board.

Q. Lastly, what you tell investors are the key questions they should be raising at the upcoming Infosys AGM and why so?

A. Investors should raise questions on: (a) When is the CEO selection process going to end and what is the date of announcement of the CEO? (b) What is the role of the promoters post the new CEO taking charge? (c) What actions will Infosys take on leadership development that will ensure that such a situation doesn‘t arise in future?

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InGovern Presence in National-level Seminars

Joint One Day Programme on Corporate Governance & Credit Rating

On 15th March 2014, ICSI jointly with ICRA Limited organized a One Day Programme on ―Corporate Gov- ernance & Credit Rating‖ at Bangalore.

The one day joint programme featured Shareholder Activism by Shriram Subramanian, Founder and Manag- ing Director, InGovern Research Services Pvt. Ltd., Bangalore. Electronic Voting by Nitin Ambure, Vice Presi- dent, NSDL, Mumbai and Bank Loan Ratings by Jayanta Chatterjee, Senior Group VP and Head South & East, ICRA Limited, Bangalore and two more experts from ICRA Limited deliberated on Grading Products and SME Ratings. All the topics were discussed for the first time at the Chapter level and received very good response from the participants.

The Programme was well attended by 76 Members.

IRDA-ICSI Seminar on Convergence of Company Law with Insurance Law - 26th April 2014

The Institute of Company Secretaries of India (ICSI) in association with Insurance Regulatory & Develop- ment Authority of India (IRDA) organised a Seminar on ―Convergence of Company Law with Insurance Law‖ on 26th April, 2014 at Taj Deccan, Hyderabad.

TS Vijayan, Chairman, IRDA was the Chief Guest. CS R Sridharan, President, The ICSI, CS Vikas Khare, Vice President, ICSI and CS Sudhir Babu C, Council Member, ICSI & Programme Director also addressed the au- gust gathering.

The seminar was addressed by a Galaxy of speakers where RK Nair, Whole Time Member, IRDA, PS Prab- hakar, Chartered Accountant, SV Sunderkrishnan, EVP & Chief Risk Officer, Reliance Life Insurance; Dr. V R Narasimhan, Chief Regulations, NSE; PR Ramesh, Chairman, Deloitte India; CL Baradhwaj, CS, Bharti AXA Life Insurance; Shriram Subramanian, Founder & MD, InGovern Research Service Pvt. Ltd.; Ashvin Parekh, Sr. Expert & Advisor, Financial Services, E&Y and Dr. P Nandagopal, MD & CEO, IndiaFirst Life Insurance Company Ltd.

The seminar was a confluence of thoughts between practitioners, academicians and regulators to identify critical governance issues in the Indian Insurance sector.

In tune with the seminar theme, the Sessions of the seminar were as under: Governance in Insurance Sector Compliance and Risk Management Stakeholder Protection (Under Company Law & Insurance Law)

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Q-n-A with InGovern MD on Recently Concluded Infosys’ AGM

Infosys held its AGM on 14th June at Bangalore. However, two days before its AGM, the company ended speculation on its leadership changes by announcing Dr. Vishal Sikka as its MD & CEO. Infosys also announced that all of its promoters will be stepping down from the Board.

InGovern MD answered to queries of various journalists and media persons on the Executive Chairman‘s speech at the AGM. Listed below are some of the questions by reporters and their replies by InGovern.

Q. At the AGM, Mr. Murthy said: Somehow the company had diluted its focus on meritocracy and accountability over the past decade. But he did not mention the reason for this. If any company dilutes its focus on meritocracy and accountability, then who should be held responsible and accountable for it?

A. The responsibility lies squarely with the CEO/MD. But, Mr. Murthy has generalized it by saying that the focus on meritocracy and accountability was diluted over the past decade! The 2003 to 2008 period was good for Infosys. It was the harsh times of 2008 and then when Mr. Shibulal took over as CEO that Infosys started implementing ridiculous policies which didn‘t foster meritocracy and accountability.

Q. Murthy also credited his son Rohan with all the major new initiatives in the last one year- "each and eve- ryone, without exception". Your comments on this. Also, even if this is true, was this too lavish a praise? Was it necessary for Mr. Murthy to make this comment? Does this show Mr. Murthy in a defensive mode?

A. It doesn‘t behove a person like Mr. Murthy to say that each and every one of the new initiatives was due to his son! Maybe, there were inputs given by Rohan for all the initiatives, but, it would be naive to say that someone who hasn‘t had any industry experience comes in and gets all credit for all the new initiatives in a company. Many of the ―new initiatives‖ don‘t look like any new ideas, and have been around at Infosys for a long while. Also, it isn‘t clear whether any of the new initiatives have had any positive outcomes for the company. Also, Mr. Murthy succumbed to a behavioral bias of defending a decision (of bringing Rohan into the company) which was incorrect in the first place.

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Shareholder Meetings in June 2014

Company Name NSE Symbol Type of Meeting Date of Meeting

State Bank of Bikaner and Jaipur SBBJ AGM 2-Jun-2014 Century Textiles & Industries Limited CENTURYTEX EGM 4-Jun-2014 Tata Global Beverages Limited TATAGLOBAL CCM 4-Jun-2014 Zee Entertainment Enterprises Limited ZEEL CCM 4-Jun-2014 Bosch Limited BOSCHLTD AGM 5-Jun-2014 State Bank of Travancore SBT AGM 5-Jun-2014 Havells India Limited HAVELLS Postal Ballot 6-Jun-2014 Development Credit Bank Limited DCB AGM 6-Jun-2014 PVR Limited PVR Postal Ballot 7-Jun-2014 Rural Electrification Corporation Limited RECLTD Postal Ballot 9-Jun-2014 Tata Global Beverages Limited TATAGLOBAL Postal Ballot 9-Jun-2014 Dewan Housing Finance Corporation Limited DHFL Postal Ballot 10-Jun-2014 Raymond Limited RAYMOND AGM 10-Jun-2014 Geometric Limited GEOMETRIC Postal Ballot 11-Jun-2014 Shree Cements Limited SHREECEM Postal Ballot 12-Jun-2014 Zee Entertainment Enterprises Limited ZEEL Postal Ballot 12-Jun-2014 Magma Fincorp Limited MAGMA Postal Ballot 13-Jun-2014 Godrej Industries Limited GODREJIND CCM 13-Jun-2014 Gujarat NRE Coke Limited GUJNRECOKE Postal Ballot 13-Jun-2014 Blue Dart Express Limited BLUEDART CCM 13-Jun-2014 Mahindra & Mahindra Financial Services Limited M&MFIN Postal Ballot 14-Jun-2014 Dr. Datson's Labs Limited DRDATSONS Postal Ballot 14-Jun-2014 Infosys Limited INFY AGM 14-Jun-2014 Power Finance Corporation Limited PFC Postal Ballot 14-Jun-2014 Yes Bank Limited YESBANK AGM 14-Jun-2014 AstraZeneca Pharma India Limited ASTRAZEN Postal Ballot 16-Jun-2014 Godrej Properties Limited GODREJPROP Postal Ballot 16-Jun-2014 Amtek Auto Limited AMTEKAUTO EGM 16-Jun-2014 United Spirits Limited MCDOWELL-N CCM 16-Jun-2014 Coromandel International Limited COROMANDEL CCM 16-Jun-2014 Prism Cement Limited PRISMCEM Postal Ballot 17-Jun-2014 Claris Lifesciences Limited 533288 AGM 17-Jun-2014 Reliance Industries Limited RELIANCE AGM 18-Jun-2014 Capital First Limited CAPF AGM 18-Jun-2014 Oriental Bank of Commerce ORIENTBANK AGM 19-Jun-2014 Syndicate Bank SYNDIBANK AGM 20-Jun-2014 Kansai Nerolac Paints Limited KANSAINER AGM 20-Jun-2014

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Shareholder Meetings in June 2014 (continued)

Company Name NSE Symbol Type of Meeting Date of Meeting

Tech Mahindra Limited TECHM CCM 20-Jun-2014 Hindustan Construction Company Limited HCC AGM 20-Jun-2014 Coromandel International Limited COROMANDEL Postal Ballot 21-Jun-2014 Bajaj Hindusthan Limited BAJAJHIND Postal Ballot 22-Jun-2014 CMC Limited CMC AGM 23-Jun-2014 Tech Mahindra Limited TECHM Postal Ballot 24-Jun-2014 ING Vysya Bank Limited INGVYSYABK AGM 24-Jun-2014 Kesoram Industries Limited KESORAMIND Postal Ballot 24-Jun-2014 Hindustan Zinc Limited HINDZINC AGM 24-Jun-2014 Bank of Baroda BANKBARODA AGM 25-Jun-2014 HDFC Bank Limited HDFCBANK AGM 25-Jun-2014 MRF Limited MRF Postal Ballot 26-Jun-2014 Allahabad Bank ALBK AGM 26-Jun-2014 Corporation Bank CORPBANK AGM 26-Jun-2014 Asian Paints Limited ASIANPAINT AGM 26-Jun-2014 Indian Bank INDIANB AGM 27-Jun-2014 Tata Motors Limited TATAMOTORS Postal Ballot 27-Jun-2014 Axis Bank Limited AXISBANK AGM 27-Jun-2014 Tata Consultancy Services Limited TCS AGM 27-Jun-2014 Vijaya Bank VIJAYABANK AGM 27-Jun-2014 Hindustan Construction Company Limited HCC Postal Ballot 27-Jun-2014 Union Bank of India UNIONBANK AGM 27-Jun-2014 IndusInd Bank Limited INDUSINDBK AGM 27-Jun-2014 Indian Overseas Bank IOB AGM 27-Jun-2014 Dena Bank DENABANK AGM 28-Jun-2014 United Spirits Limited MCDOWELL-N Postal Ballot 28-Jun-2014 Central Bank of India CENTRALBK AGM 30-Jun-2014 IDBI Bank Limited IDBI AGM 30-Jun-2014 Punjab National Bank PNB AGM 30-Jun-2014 ICICI Bank Limited ICICIBANK AGM 30-Jun-2014 J.Kumar Infraprojects Limited JKIL Postal Ballot 30-Jun-2014 IL&FS Transportation Networks Limited IL&FSTRANS Postal Ballot 30-Jun-2014 Hindustan Unilever Limited HINDUNILVR AGM 30-Jun-2014 Rallis India Limited RALLIS AGM 30-Jun-2014 Gammon Infrastructure Projects Limited GAMMNINFRA AGM 30-Jun-2014 Gammon India Limited GAMMONIND AGM 30-Jun-2014 UCO Bank UCOBANK AGM 30-Jun-2014

To subscribe to our vote recommendation reports write to us at [email protected]

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About Us

First Proxy Advisory Services company in India

Fostering institutional shareholder activism in India through Governance and Proxy research

Pioneering Proxy Analysis and Research in India

Office Locations: Bangalore & Mumbai

InGovern Research Advisory panel of corporate governance experts Services Pvt. Ltd. Team of Analysts with background in Finance, Investment Banking, Capital

Markets and Management T: +91-80-4227-9150

E: [email protected] Sale and Distribution of Vote Recommendations also through Broadridge ProxyEdge® platform

We are in the news!

InGovern in Business Standard on Balance in Remuneration to Directors—Link to the Article

InGovern in The Hindu on Boardroom disclosures - Link to the Article

InGovern Impact: Kiran M. Shaw apologizes after controversial Boardroom tweet—Link to the Article

InGovern in Business Standard on role of auditors in MCX fiasco - Link to the Article

InGovern in Economic Times on curbing of Insider Trading - Link to the Article

InGovern in Firstpost on BG Srinivas exit from Infosys - Link to the Article

InGovern in Times of India on Exodus of Top Executives from Infosys - Link to the Article

To contact us for more information, write to us at [email protected] or [email protected]

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