THE 2014 PROXY SEASON

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THE 2014 PROXY SEASON
October 2014
1
Increased focus on corporate governance in 2014
–
–
–
–
levels
between
management
and
Investors are voicing their opinions on management decisions
Related party transactions to be passed by a majority of minority votes
Companies have started reaching out to investors for critical resolutions
E-voting has eased shareholder participation
• New regulatory requirement focused on improving corporate
governance standards
– Modern regulatory framework for companies with a more comprehensive
understanding of stakeholders
– Focus on strengthening internal oversight by empowering independent
directors
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• Higher engagement
shareholders
• IiAS played a key role in guiding investors on the corporate
governance agenda
– Advisory on more than 500 companies published at least 12 days before
the meeting date
– Prompt reactions published on regulatory changes and governance issues
2
Investors’ voice has become bold and loud
% of
institutional
investors in
Marico voted
AGAINST the
MD & CEO
Stock Option
Plan 2014
72
% of
institutional
investors in
GMR Infra
voted
AGAINST the
reappointment
of Srinivas
Bommidala
(promoter)
Shareholders
disapproved
payment of
minimum
remuneration
to executive
directors of
Tata Motors
(See disclosure
below)
Shareholders
disapproved
issuance of
equity
shares,
creation of
mortgage of
assets, and
transactions
with related
parties in
Panacea
Biotec
Shareholders
got an
injunction
from the
Courts
staying PTL
Enterprises
from
presenting a
resolution
regarding the
sale of its
hospital
business to
vote
Disclosure: Tata Investment Corporation Limited and Tata Motors Limited are a part of the Tata group. Tata Investment Corporation Limited holds equity
shares in IiAS. IiAS recommended voting FOR on all three resolutions regarding remuneration.
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49
Legal
Defeated Defeated Recourse
3
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CONTENTIOUS DECISIONS
4
Proposal
Concerns
•
•
•
Pay upto 0.25% of the consolidated
net turnover as brand license fee
Brand owned by a company of the
promoter’s wife
JSW
Energy
For
Against
Institutional
investors
34%
66%
Retail
+
institutional
investors
83%
17%
•
•
Note: Regulations did not permit promoters of
JSW Energy to vote in the resolution. In the
interim, MCA clarified only interested parties in a
related
party
transaction
cannot
vote.
Accordingly, non–interested promoters of JSW
Steel were permitted to vote.
Brand was created by the companies
and not by promoters
No clarity regarding the tangible
benefit from the use of the ‘JSW’
brand
Estimated Rs.1.5 bn to be paid as
brand license fee: Rs.1.30 bn from
JSW Steel Limited and Rs.0.22
million from JSW Energy Limited
JSW Steel
For
Against
Institutional
investors
70%
30%
Votes polled
95%
5%
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JSW Steel and JSW Energy: Is the brand fee justified?
5
The Deal
Concerns
•
•
•
•
PTL Enterprises to sell hospital
business for Rs.1.81 bn
– Hospitals accounted for over 85%
of revenues and over 25% of
profits
– Hospitals had just begun to
become profitable
Sale of the hospital business was to
a promoter-owned unlisted company
Promoters hold over 70%, Kerala
State Government owned over 7%,
remaining
held
by
retail
shareholders
Outcome:
• Kerala High Court grants a stay
• PTL is compelled to withdraw
resolution from the AGM
Events
•
•
the
Valuations were too low
– Sale price was below cost, but the
business was profitable
– Based on valuations of similar
transactions, estimated sale price
was not less than Rs.7 bn
IiAS unites retail shareholders and
created public pressure
– Published reports showing reasons
for the low valuations
– Established a pattern of promoter
behavior of buying stabilized
businesses from listed companies
Kerala State Government and retail
shareholders take steps to stop the
sale
– IiAS recommendations used to
establish credibility of the petition
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PTL Enterprises: Retail shareholders unite
6
United Spirits: Different standards for Indian subsidiaries
•
•
Reappoint Vijay Mallya as director
– Part
of
the
shareholder
agreement between Diageo and
United Spirits
Triple PA Murali’s remuneration to
Rs 128.9 mn
– Includes a one-time bonus of
Rs. 50 mn.
– Remuneration
will
remain
unchanged even if the company
continues to report losses
Concerns
•
•
•
IiAS’ questions Diageo’s different standards:
• Would Vijay Mallya be appointed to the global
board?
•
• Would Diageo retain its global CFO on the
backdrop of such write-offs and qualified
accounts, let alone give the CFO a handsome
raise?
Limits the company’s ability to
raise funds from banks
– Vijay Mallya is declared a wilful
defaulter – therefore, banks
cannot lend
– Both
Vijay
Mallya
and
Kingfisher are contesting this
in the courts
Accounts are qualified
Consolidated net loss of Rs.44.9
bn in FY14
– Rs.9.8 bn provided for loans to
UB group companies
– Write off of Rs.43.2 bn against
Whyte & Mackay
PA Murali, as Group CFO, is
answerable for transactions that
have been written off
– Revised
remuneration
significantly higher than peers
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The Resolutions
7
The Resolutions
Concerns
•
•
Approve promoter’s pay and set
minimum remuneration
– Aggregate pay of six executive
directors was Rs 81.9 mn in FY14
•
NCC: Consolidated PAT
Rs mn
3000
2500
2000
Seven of the fourteen directors are
promoters
Secular decline in company profits
– family remuneration not justified
– Total remuneration accounts (Rs
81.9 mn) to more than twice the
consolidated profits (Rs.32.8 mn)
in FY14
1500
1000
500
0
FY10
FY11
FY12
FY13
FY14
Other companies in which the no. of promoter directors is high:
Company name
No. of promoters on the board
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NCC Ltd: Boardroom or family dinner table?
Total board size
Talwalkar Better Value Fitness
6
12
Navneet Education
5
12
Apollo Hospitals
5
14
Lupin
4
10
Career Point
4
9
8
Marico Limited: Reading the unwritten
•
Grant additional 0.5% of equity as
stock options under MD & CEO
ESOP 2014
– Exercise price is face value of
Re.1
– At the current market price
(Rs.237.0), the total cost of the
scheme is Rs.761.0 mn
– Equivalent to 13.2% of the FY14
net profit of the company.
– Grant period not defined
– This was the second of such
schemes, launched within 4
months of the first scheme
Historical Construct
•
•
First scheme in March 2014: ‘ESOP
2014’ launched to grant 0.3 mn
stock options
– Total cost of the scheme Rs.62.7
mn
– Grant period was not defined – the
resolution was silent on this
All stock options awarded on the
first day of the CEO’s term
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The Resolution
IiAS opinion: Based on the historical construct, IiAS recommended voting against the
resolution.
Outcome: 49% institutional investors voted against the resolution.
9
Indiabulls Housing Finance Ltd: Independent directors
removed
•
Restructure
the
board
by
removing
three
independent
directors and two non-executive
directors
– Split within the promoter group
led to restructuring across
group companies
– Restructuring is intended to
bring in greater professionalism
and experience
IiAS Questions
•
•
•
Outcome: Four new independent directors
were appointed.
IiAS’ opinion: No significant difference in the
profile of the old and the new directors.
Why
were
the
independent
directors appointed in the first
place?
Were the directors not qualified?
Why didn’t the directors retire
voluntarily?
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The Resolutions
Hathway Cable & Datacom Ltd: Independent directors
absent in board meetings
•
Concerns
Reappointment of independent
directors
•
Attendance of three directors less
than 45% in FY14
Average attendance over the last
three years less than 75%
•
Attendance details of independent directors
Name of director
Brahmal Vasudevan
Sasha Mirchandani
Sridhar Gorthi
Devendra Shrotri
FY12
(2/5) 40%
(5/5) 100%
(3/5) 60%
(5/5) 100%
FY13
(2/8)
(5/8)
(4/8)
(6/8)
25%
62%
50%
75%
FY14
(3/7)
(5/7)
(2/7)
(3/7)
43%
71%
28%
43%
Average
Attendance
36%
78%
46%
73%
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Proposal
IiAS’ opinion: Poor attendance levels denote lack of commitment. IiAS is
concerned about the functioning of the board.
11
Essar Group: Timing the delisting
•
Essar Energy plc proposed to delist
– Promoters held 78% of the company
– Essar Energy is the parent company
of Essar Oil and Essar Power
– Delisting price was 78p
Concerns
•
• Market price around the time of the
announcement was 66p
•
Essar Oil proposed to delist
– Essar group controls over 90% of the
shareholding
– Delisting of equity shares at 6x the
book value
Timing of the delisting
– Both companies were recovering
from previous performance shocks
– Shareholders would be robbed of
the upside potential
• Improving business environment
would lead to better performance
•
Group’s checkered history with
investors
– Allegations
of
cleverly-timed
delistings in the past
• Floor price of Rs.108.18
• Aggregate offer size of Rs.14.8 bn
•
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The Delisting Proposals
Essar Group planned to take the
hydrocarbons business private –
hence the delisting
IiAS Recommendation: Shareholders must vote FOR Essar Oil’s delisting but
participate in the price discovery process to get the ‘right’ price’.
12
Proposal
Concerns
•
•
•
Suzuki would set up the Gujarat
plant in a 100% subsidiary
– Earlier, Maruti had announced it
would set up its third plant in
Gujarat
• Gujarat plant would double
Maruti’s capacities (75,000
cars to 150,000 cars)
Maruti to buy cars from Suzuki
Gujarat at cost
– Suzuki would fund the first
phase of production, remaining
two phases to be funded from
sale of cars to Maruti
Outcome:
• Maruti tweaks the deal to address some
investor concerns
• Agrees to put the transaction to vote
•
•
•
The transaction would not be put
to shareholder vote
The announcement was sudden –
investors were not consulted
Balance of power shifted squarely
in favour of Suzuki
What will Maruti do with its
existing cash balance?
Events
•
•
IiAS was the first to call the deal
negative
for
minority
shareholders
– Published papers as events
unfolded
Minority shareholders together
wrote to management raising
concerns
– Almost takes legal route
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Maruti’s Gujarat Plant Deal: Shareholders unite
13
Maruti
announces
the
Gujarat
deal
IiAS provides guidance
to market participants
28 Jan
2014
The
deal
weighs
against Maruti
by adding to
the
complexity of
the operating
and
ownership
structure
Maruti
Chairman
says deal is
win-win for all
stakeholders
4 Feb 2014
• The
Maruti
says
shareholder
approval
not
required as new
related
party
regulations are
yet to be notified
7 Feb 2014
Maruti changes
its initial stance
and
clarifies
that it will seek
shareholder
approval
15 Feb 2014
parent • IiAS puts out a IiAS
welcomes
comment
(Suzuki)
has
the move, but
highlighting
short-changed
points out that
how
Maruti the structural and
Maruti’s
may
have operational
shareholders
timed
the issues with the
announcement deal still remain
• In
another
to
take
report,
IiAS
advantage of
points out that
the regulatory
Maruti
would
ambiguity
have
yielded
higher ROCE by • IiAS lists down
the
legal
investing in the
options
Gujarat
plant
available
for
itself
shareholders
Maruti publishes Maruti
term sheet for the management
transaction
does road shows
to
convince
shareholders
6 Jun 2014
11 Sep 2014
IiAS points out
that
the
fundamental
concerns over
the transaction
have
not
changed - the
deal only adds
complexity
to
the
operating
structure
IiAS points out
that
in
September
2004,
the
management
had opposed a
similar
proposal
by
Suzuki to set
up plant in
Manesar
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Events, as
they unfolded
Maruti’s Gujarat Plant Deal: IiAS anchors the debate
14
AstraZeneca Pharma: OFS route used to compel delisting
The Proposal
Concerns
•
•
•
Incremental 15% parked with
‘friendly’ investors (FIIs) during
the May 2013 offer for sale (OFS)
– Reduces the delisting threshold to
90% from 95%
In 2014, SEBI announced monitoring
of the third delisting offer
– Process would be manipulated by
the company through the ‘friendly’
investor
Pre-OFS: Delisting Threshold 95%
Post-OFS: Delisting Threshold: 90%
9% 1%
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•
Delisting of AstraZeneca Pharma
proposed by parent company
– Promoter holds 75% stake and FII
holds 15.9% stake in the company
– Voluntary
delisting
offer
at
Rs.854.1
Third attempt to delist
– In 2004, the company withdrew the
offer due to high discovered price
– In 2010, shareholders rejected the
plan
16%
Promoter
9%
Retail
Institutional
75%
90%
15
Cairn India: Circumventing the rules
•
Cairn India’s subsidiary extended a
two-year loan of $1.25 bn to a
Vedanta group company
– Company claimed favourable terms:
Interest rate of 3% over the ongoing
LIBOR rate for a two year period
– Large
outflow:
Cairn
India’s
consolidated revenues in FY14
aggregated around $3.4 bn
Concerns
•
•
•
Violation of good governance
practices
Shareholders taken by surprise
– No disclosure in the quarterly
results or company presentation
Disclosure made after $800 mn of
the $1.25 bn loan was disbursed
Analysis: Related party transactions disclosure and shareholder approval
requirements do not apply to transactions undertaken by unlisted subsidiaries of
listed companies.
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The Transaction
Outcome: Shareholder outcry; stock price dropped by over 10% following the
announcement
being a global firm, the company should have made a disclosure at the time of entering
into loan agreement, 16
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Markets
Governance
Where Markets intersect Governance
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