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Institutional EYE

Commentary on Corporate Governance Issues

Tata Group: Reading the shareholder vote

Six resolutions were put to vote in four recent Tata group company meetings. Analysing the outcome data in the aggregate and by splicing it by resolution and by type of investor holds important learnings for the market.

Four listed companies in the Tata group have recently held their extra-ordinary general meetings.1 These are Tata Consultancy Services Limited (meeting date 13 December 2016), Tata Steel Limited (21 December 2016), Tata Motors Limited (22 December 2016) and Tata Chemicals Limited (23 December 2016).

Six resolutions were put to vote in these meetings: one resolution was for the removal of Cyrus Mistry, three for the removal of Nusli Wadia and two for the appointment of directors. The data throws up some discernible patterns, and contains five messages for corporate India.

1. Shareholders need a compelling reason to support a resolution - Voting FOR is no longer a default option The enthusiasm of the Indian citizenship about voting is reflected in shareholding meetings too. On an average, NIFTY 50 companies have seen about 63% of its non-promoter votes being cast in 2016. But, for the resolutions presented by the Tata companies in their EGMs, voting percentages were lower than average.

The data shows that several institutional shareholders abstained from voting – especially in the more contentious decisions regarding the removal of Cyrus Mistry (in TCS) and Nusli Wadia as directors. This could well mean that neither side – Tata Sons, nor the director being removed – could provide a compelling argument to investors. While abstaining results in a tacit support to the controlling shareholders – the voting power of the shares increases – it also signals investors’ unease with the resolution.

2. Voting is no longer a tick-the-box exercise - it is resolution specific Tata Chemicals is an interesting control-set since it had three separate resolutions. Far fewer shareholders voted for the resolution relating to Nusli Wadia than for the appointment of Bhaskar Bhat and S Padmanabhan. And while roughly the same number of votes were cast for their appointment, the “FOR” votes in the case of S Padmanabhan at 152,741,399 were almost 13% higher than for Bhaskar Bhat at 135,586,857. IiAS understands that a few investors held back their vote because they believed Bhaskar Bhat made a hasty decision in resigning from Tata Chemicals’ board after the 10 November, 2016 meeting. From our conversations with both FIIs and DIIs, we understand that these investor sets have voted differently. The more FII’s hold, the tighter the race.

3. The independent director matters

The sequence of events from the moment Cyrus Mistry was unseated repeatedly highlights the role of the independent directors – be it on the board of Tata Sons or those of the operating companies: Were they right in removing Cyrus? Which operating company’s board supported him? What was the mix between independent and non-independent directors? In fact, Tata Steel appointed an independent director to chair its board and the various EGM’s were conducted with an independent director in the chair.

Even as investors questioned who exactly an independent director serves, they were not willing to see one removed: the resolution to remove Nusli Wadia had investors rooting for him. If the promoter’s votes are excluded, in two of the three companies, the investors voted for Nusli Wadia to continue. This should embolden independent directors: the Nusli Wadia voting pattern shows that removal of independent directors by the principal shareholder is contentious. Investors value their existence on the board and them holding their voice will have long-term consequences for Indian boards and governance of companies.

4. If group companies abstain or vote against, is there any advantage in cross-holding?

Interestingly, data shows that all promoter companies did not vote: in fact in Tata Motors, one of the companies voted against the removal of Nusli Wadia. Companies with cross holdings, where Nusli Wadia was on the board, abstained for voting for his removal.

This is different from a related party transaction where the controlling shareholder has no vote. Here the board wilfully decided to abstain. Group companies will not always be generous to the controlling shareholder: Cross-holdings may not always remain a boon; they contain a kernel of risk.

5. Investors focus on the now while voting, not on the past: For the Tatas, a century of building trust served limited purpose when it came to the vote. The vote against – excluding promoters, crossed the half-way mark for two resolutions analysed.

Companies do not exist in Dorian Gray’s world: all actions are noted and acted upon – be it perception, social media chat, the multiples they enjoy. Companies are judged every day.

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