At India Inc, Shareholder Votes Rarely Challenge Promoter Power

Institutional ownership in companies may be increasing, but if a recent report is to be believed, company promoters still continue to exercise significant control thanks to their majority stake in most companies.

In 2024, just 24 out of 4,840 resolutions put to vote by Nifty 500 companies were rejected, according to a study by proxy advisory firm Institutional Investor Advisory Services (IiAS).

Only 12 companies saw any resolutions fail, with Finolex Cables facing the most dissent — ten resolutions, mostly on director appointments, were voted down. Nestle faced pushback when shareholders rejected a proposal to increase royalty payments to its Swiss parent.

Promoters Rule The Roost?

The percentage of rejected resolutions continues to be low in India because of high shareholding of promoters. Promoters having 51% ownership often tilts the scale in their favour. With a majority ownership, promoters as a category own more than the two other categories of investors — institutions and others — and subsequently have a decisive say on the outcomes. The others include family offices, HNIs, retail and private equity.

Combine this with a high percentage of participation during these votes, and promoters continue to hold sway.

“Promoters vote ‘aye’ almost 100% of their shares unless there is an intra-promoter feud going on. Institutions vote about 96% for, and others are about 99% for. So the overwhelming vote is for,” Amit Tandon, managing director of IiAS, told The Core.

The Salary-ESOP Conundrum

Even in cases where institutions reject a resolution, it is passed by the majority shareholders, leaving most minority shareholders to grin and bear it.

As per the study, Interglobe Aviation, Adani Ports, Persistent Systems, Blue Star, and SAIL feature amongst companies where institutional dissent was around 40%, but the resolution was passed.

Tandon pointed out that while most institutional investors seem to partly condone related party transactions, they are unhappy with remuneration and compensation resolutions as well as employee stock options (ESOPs). The former could mostly be related to C-suite compensation as well as that of the directors.

“The area where investors push back is ESOPs, as they want to see an alignment of interest. So if they're buying shares at Rs 100, they expect that the employees will also be given shares at or close to Rs 100. If it's at a steep discount, they don't see that alignment of interest. While companies view ESOPs as deferred compensation, investors see it as pay at risk,” Tandon explained.

The next set of resolutions that anger institutional shareholders is compensation. “If you go back five or six years, compensation wasn't a big issue in the Indian market. After the pandemic, what you find is that the compensation has grown faster than both the top line and the bottom line, at least for the largest 500 companies. That is becoming a big challenge,” said Tandon.

Amongst related party transactions too, shareholders are accepting of sectors like auto parts, where manufacturing linkages exist or amongst large groups like Tatas with varied interests. The rest where they see trouble, there is dissent.

“They (shareholders) have concerns when there are adjacencies which can't be explained or dependencies which are built up, which is to say that, look, you've got the family, which is kind of becoming the supplier. You're routing the exports through one of the family-owned concerns, or you're buying raw materials through a family-owned concern, et cetera. Those are the dependencies. That is where the investors have a big issue,” Tandon elucidated.

Special rights built into articles of association where private equity firms receive board seats irrespective of ownership percentage, or promoters receive special rights, are red flags that most shareholders see.

"In Nestle, there was an issue with the royalty payment. Investors want to see a better explanation in terms of why is it that the royalty agreement is changing now. Is the company going to bring in more products? Are they bringing in newer technology? That needs to be explained a lot more clearly," said Tandon.

Smarter Shareholders, Lowering Promoter Power

Promoter hold over their companies in India has been outsized for a while now. Since August 2011, only one in every 200 resolutions was defeated, showing how far and wide their influence yields.

The regulator has been trying to correct it by limiting delegation to the board, wherein shareholders need to sign off on most decisions. Some of these regulations include majority-of-minority approvals and ordinary to special resolutions.

However, IiAS advocates a deeper democratic approach with a shareholder dissent review mechanism. “Under such a framework, if a resolution is approved despite significant shareholder opposition, the board will be required to formally engage with dissenting minority shareholders, understand their concerns, and either explain themselves more clearly, or take appropriate corrective actions,” the study said.

Moreover, the extent of promoter shareholding has been coming down over the last three years. Also, when it comes to weighing the marketcap shareholding of institutions, it’s slightly higher at 35% of equity, unlike the 27% which is where every share counts. They might also require more voice in the assets they own.

“They (promoters) just can't assume that because we've done it in the past, we have a right to do it now. Shareholders have changed, the market expectations have changed,” says Tandon.

A balance must be achieved between promoters who own around half as well as the investors who hold the other half.