Boardroom decisions evidently overlook shareholder sentiments
In the vibrant landscape of Corporate India, shareholder activism is gradually gaining ground, albeit at a slow pace. This evolving phenomenon is marked by a significant increase in institutional shareholder participation over the past decade.
### The Rising Tide of Institutional Shareholding
Institutional shareholders, who previously held a modest 10-15% of shares in Indian Inc, now command a substantial 79.29%. This surge in participation is slightly higher than the promoter participation rate of 78.69%.
### The Ebb and Flow of Dissent
Despite this high participation, institutional investor dissent remains relatively low at 5.44%. However, this figure masks the growing influence of institutional investors, as demonstrated by the recent case of Zee Entertainment. In this instance, institutional shareholders effectively blocked a promoter's plan to raise their stake through fund infusion.
### Factors Influencing Shareholder Activism
1. **Promoter Influence**: In many Indian companies, promoters hold a majority stake, which often gives them an edge during the voting process. This dominant ownership structure can make it challenging for shareholder activism to succeed unless significant opposition is mounted.
2. **Legal Framework**: India's Companies Act, 2013, and SEBI regulations provide a legal framework that supports shareholder rights. However, the high shareholding thresholds required for substantial influence can limit the effectiveness of activism by smaller shareholders.
3. **Institutional Investor Stewardship**: The cautious approach of institutional investors in India contrasts with more active stewards in markets like the US and UK. This difference is partly due to the fact that companies in India are more promoter-led and less institutionally owned.
4. **Recent Successes**: The success of the Zee Entertainment case suggests that coordinated efforts by institutional investors can lead to significant influence. This could encourage more activism, but it remains to be seen how often such unified action will occur.
### The Role of Mutual Funds
Mutual funds, which now account for a significant portion of institutional investors, are increasingly playing a role in highlighting their concerns through the voting process. In 2024, the proportion of mutual funds voting against board resolutions in India more than doubled compared to 2015, reaching 7%.
### The Declining Number of Defeated Resolutions
In 2024, only 24 out of 4,840 resolutions put to vote by Nifty 500 companies were defeated. This represents a decrease from previous years, suggesting that companies are becoming more adept at managing shareholder concerns.
In conclusion, while shareholder activism is still a work in progress in Corporate India, the growing influence of institutional investors and the success of recent cases like Zee Entertainment offer a promising outlook. As institutional investors become more assertive and coordinated, we can expect to see more significant shifts in corporate decision-making.
- Given the rising trend of institutional shareholding in India, as exemplified by the 79.29% held by institutional shareholders compared to promoters' 78.69%, it appears that the landscape of corporate finance, particularly in terms of markets and investments, is increasingly being shaped by these institutional investors.
- Despite the substantial presence of institutional investors in the market, their role in influencing corporate business decisions can sometimes be underestimated, as shown by the Zee Entertainment case, where institutional investors effectively thwarted a promoter's plan by blocking a stake increase through fund infusion.
- As mutual funds, which are a significant portion of institutional investors, are becoming more assertive in their investment strategies, such as voting against board resolutions, finance and investing in the stocks market of Corporate India could see more significant changes due to the increased assertiveness of institutional investors.
