Sunday, February 12, 2017

EGMs of Tata Companies - Some Reflections

Small investors lack capabilities, resources and motivation to exercise the voting right in general meetings. But block holders (those who hold more than 5 percent shares) and institutional shareholders have the capacity and resources to analyse the outcome of a proposal on the performance and governance of the company. Therefore, it is their solemn duty to exercise the voting right. However, institutional shareholders sometimes abstain from voting. Even in highly publicised and high voltage EGMs of Tata companies, which were held in December 2016 to remove Mr. Nusli Wadia as independent director, voting by institutional shareholders was 75.02 percent in Tata Steel, 69.23 percent in Tata Motors and 57.08 percent in Tata Chemicals. This implies that some institutional shareholders abstained from voting. With electronic voting, the cost of exercising the voting right is almost zero. Therefore, the only reason for abstaining is that the institutional shareholder does not want to take a position, for example, in a controversial issue or where two powerful groups are involved, as voting either way might hurt its own business interest. But in the process it hurts the interest of its shareholders, unit holders or policyholders, as its return on investment in the investee company depends on the quality of governance and management of the that company. At the macro level, abstaining from voting hurts the country, as shareholder activism improves the quality of corporate governance in the country. As the institution on independent directors is inherently weak, only shareholder activism can protect minority interest and interest of other stakeholders.
As on September 30, 2016 the promoter group controlled 32.43% of Tata Motors, 31.35% of Tata Steel and 30.80% of Tata Chemicals. On December 13, Tata Group acquired additional 1.73 per cent shares in Tata Motors. Therefore, there is no surprise that resolutions to remove Mr. Wadia were passed with significant majority. In case of Tata Steel 90.80 percent of votes polled were in favour of removing Mr. Wadia. The same was 71.20 percent in case of Tata Motors and 75.67 percent in case of Tata Chemicals. Had the company law required special resolution (three-fourth majority) for removing an independent director, Mr. Wadia could not be removed from Tata Motors and in case of Tata Chemicals it would have been a close call. It might be appropriate to debate whether, in order to protect the independence of independent directors and to strengthen the institution of independent directors, the law should require a special resolution for the removal of independent directors.
Primary responsibility of independent directors is to protect the interest of non-controlling shareholders (commonly called minority shareholders). Therefore, it is appropriate that minority shareholders should have significant say in the removal of independent directors. For example, in case of Tata Chemicals, 51.45 percent of votes of institutional shareholders went against the resolution for the removal of Mr. Wadia, but that was not reflected in the overall result. In case of Tata Motors, institutional shareholders were almost equally divided in favour of and against the resolution. 49.94 percent of votes of institutional shareholders went against the resolution. However, the story was different in case of Tata Steel. 82.48 percent of votes of institutional shareholders went in favour of the resolution.
When the controlling shareholder proposes to remove an independent director, its 100 percent vote is polled in favour of the resolution. Therefore, it is easy to pass an ordinary resolution (simple majority). For example, if 30 per cent shares are held by the controlling-shareholder, the ordinary resolution will be passed, even if all public shareholders vote and 70 percent of their votes go against the resolution.
It is reasonable to assume that 70 percent vote of institutional-shareholders and 5 percent vote of public shareholders (other than institutional shareholders) are generally polled. In that situation, if institutional shareholding is 40 percent or less, the resolution will be passed as ordinary resolution even if all the votes of institutional shareholders and other public shareholders go against the resolution.
With those assumptions, if, institutional shareholders hold 10 per cent or less voting rights, the resolution will be passed as special resolution even if all public shareholders (including institutional shareholders) vote against the resolution. If, institutional shareholders hold 40 per cent voting rights, the resolution will be passed as special resolution even if around 50 percent of votes of public shareholders (including institutional shareholders) go against the resolution.
Therefore, there is a strong case for mandating that the resolution for the removal of independent directors should be treated as ‘special resolution’.  

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