IIAS Investor survey 2014

2014

IiAS survey

Institutional Investors’
Attitudes to Corporate Governance

In association with

IiAS Survey 2014

Institutional Investors Attitudes to Corporate Governance
1

Foreword
The ownership pattern of corporations in India has been steadily changing. Two classes have increased
their shareholding perceptibly over the last two decades: promoters (and this includes multinational
parents) and institutional investors. As a result, institutional investors are becoming more engaged
with companies and proactive in their scrutiny of corporate governance standards. The increased
dialogue is in part because their investors in turn, expect them to do so and in part because regulators
are asking them to. Regulations now mandate asset managers to vote and companies now need
approval by ‘majority of minority’ for related party transactions, changed disclosure standards and live
with increased risk of a class action suit being filed.
It is against this backdrop that IiAS that has undertaken its second survey on “Institutional Investors’
Attitudes to Corporate Governance”.
This year, the survey focusses on the proposals in the new Companies Act, the SEBI Consultative Paper
on corporate governance, the perceptions of corporate governance across industries, as well as a
number of case studies that have made headlines in corporate India over the last few months.
The survey responses are based on an online poll of more than 70 participants, spread across mutual
funds, insurance companies, HNIs and other institutional investors. Participants to this survey have
nearly doubled from last year, which reflects the increased focus of investors on corporate governance.
We have taken care to ensure that the survey questionnaire provides a fair reflection of the market
perception on the role of corporate governance in the overall investment framework.
The final message is clear. A majority of institutional investors find a strong relationship between
governance and stock return. A governance deficit, in their opinion, can create investment risks and
they are therefore willing to engage with the company on critical issues.
We would like to extend our appreciation to all the participants for the time and enthusiasm devoted to
providing comprehensive responses.
We are hopeful that the findings of the survey would make companies more responsive to investor
sentiments and pave the way for a constructive and meaningful debate on corporate governance.

Amit Tandon
February 2014

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I welcome you to the second IIAS Annual Survey on Corporate Governance, which has been sponsored
by Reliance Capital Asset Management Limited (RCAM).
Securities and Exchange Board of India (SEBI) has time and again emphasized that the institutional
investor community is in a position to play an important role in ensuring good and strong corporate
governance by actively participating and exercising its voting rights in respect of various proposals/
resolutions, which require shareholders consideration, from time to time. This gives voice to investors
who have invested in the capital markets through us and additionally, it also indicates our opinion to
other small investors, who may be invested directly.
SEBI has also been persistently spreading awareness about the importance of corporate governance
and had put into place, various checks and balances through Clause 49 of the Listing agreement (e.g. the
composition of the board, setting up of audit committees, remuneration of non-executive and
independent directors and disclosures and certifications to be made in the annual reports, to name a
few). The new Companies Act, 2013 has also placed strong focus on corporate governance in its widest
sense.
Shareholder activism is still fairly nascent in India, but the writing on the wall is clear, with the
increasing levels of awareness, and the strong regulatory emphasis on independence of boards and
auditors on the one hand and disclosures on the other, both shareholders and the general press will get
more vociferous about actions taken by Managements, whether they be family-managed or
professionally managed businesses. The new Companies Act also reflects this by enabling class action
suits.
At RCAM, we welcome this trend and we hope that this survey will contribute to further strengthen this
movement and drive home the fact that investors will increasingly view good corporate governance and
disclosures as strong value creators.

Sundeep Sikka
Chief Executive Officer
Reliance Capital Asset Management Limited
Mumbai,
February 2014

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CONTENTS
Section 1: Perceptions of corporate governance....................................................................................... 5
A. The role of corporate governance in driving investment ....................................................................... 5
B. Relationship between corporate governance and price performance .................................................. 6
C. Perceptions of corporate governance across industries ........................................................................ 9
D. Why governance matters ........................................................................................................................ 10
E. Corporate governance perceptions across companies ......................................................................... 12
F. Corporate governance issues based on different types of ownership and management .................. 14
G. Analysis of companies by type of management .................................................................................... 17
Section 2: Case Studies ................................................................................................................................. 18
A. Executive Appointments ......................................................................................................................... 18
B. Executive remuneration .......................................................................................................................... 20
C. Strategy and valuation ............................................................................................................................. 21
D. Royalty...................................................................................................................................................... 22
Section 3: Shareholder activism ................................................................................................................. 23
Section 4: Opinion on regulatory initiatives of the Companies Act 2013 ........................................... 24
A. Independent Directors ............................................................................................................................ 24
B. CSR Mandate ............................................................................................................................................ 25
C. Auditor Rotation ...................................................................................................................................... 26
D. SEBI: Scheme of Arrangement ................................................................................................................ 27
E. Others........................................................................................................................................................ 27
F. Overall response to Companies Act and its expected impact on governance of companies.............. 28
Section 5: Involvement in governance of portfolio companies ............................................................ 29
A. Shareholder resolutions .......................................................................................................................... 29
B. Engagement between market participants and companies ................................................................. 31
Section 6: Shareholder engagement and the role of proxy advisory firms ........................................ 33
Conclusion ....................................................................................................................................................... 34
Profile of survey participants...................................................................................................................... 35

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SECTION 1: PERCEPTIONS OF CORPORATE GOVERNANCE
This section studies investors’ perceptions of corporate governance. We focus on three areas:
i. The role of corporate governance in driving investment
ii. Perceptions of corporate governance across industries
iii. Perceptions of corporate governance across companies.

A. THE ROLE OF CORPORATE GOVERNANCE IN DRIVING INVESTMENT
Investors driven by industry dynamics


Industry growth prospects emerged as the most important driver of investment for institutional
investors, with 68% of respondents, followed by a company’s competitive standing in the industry.
63% of the respondents ascribed very high importance to corporate governance of the company.

What drives investment?

Growth prospects for
industry/sector
Company's competitive position in
the industy/sector
Corporate governance of the
company

68%

Historical stock market
performance

6%

63%

31%

2%

63%

29%

4%

Important

6%

Neutral

Extremely important

Reputation of promoter/CEO
Quality of financial reporting

23%

57%

32%

Unimportant
44%
31%

46%
46%

8%
19%

Source: IiAS Institutional Investor Survey 2014

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B. RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND PRICE
PERFORMANCE
Corporate governance is a very important criterion while investing


More than three fourths of the respondents believe that well governed companies will always
command a premium to their industry peers. 18% of respondents believed that corporate
governance is one of many important determinants of share price returns; conversely just 4% of the
respondents felt that corporate governance is unimportant. Investors should therefore be willing to
play an active role in improving governance standards in investee companies and thereby improve
shareholder returns.



More than a quarter of the sample has chosen to invest in a company purely because of high
standards of corporate governance: Infosys being the most common investee company.



While 74% of the investors polled have not invested solely because a company has high corporate
governance standards, 79% of the respondents have refrained from investing in a high growth
company solely because of issues of corporate governance.



Nearly three fourths (73%) of the investors have exited a company because of concerns over
corporate governance.

Instances of companies in which high standards of corporate governance was the primary driver
of investment

Source: IiAS Institutional Investor Survey 2014 (Figures indicate number of investors who invested in the company
purely because of its high standards of corporate governance)

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How do you view the relationship between corporate governance and share price returns?

Well governed companies will always command a valuation premium in
their industry

4%
18%

Corporate governance is just one of the many important determinants of
shareholder return.

78%

Industry dynamics and management effectiveness are the most
important determinants of shareholder return, corporate governance is
relatively unimportant


Correlation between Corporate Governance and shareholder returns
Have you invested in any
company purely because they
have high standards of
corporate governance?

Conversely, have you refrained
from investing in a high-growth
company purely because of
concerns over corporate
governance?

21%

27%

26%

73%

79%

74%

Yes

Have you ever exited a
company because of concerns
over corporate governance?

No

Yes

No

Yes

No


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Clarity regarding accounting practices emerges as the most important dimension of corporate
governance:
Clarity in business and accounting practices is considered to be the most important dimension in
corporate governance by investors. Fair dealing with clients and suppliers is considered to be the
second most important determinant followed closely by balanced board composition with strong
representation from independent directors. Compliance and process driven company and
remuneration are important determinants while positive impact on community is given the least
importance.

What is the most important dimension of corporate governance?

Clarity in business and accounting
practices, and detailed disclosures
Fair dealings with clients and suppliers
Balanced board composition with strong
representation from independent directors
Equitable compensation practices
Compliance-driven and process-driven
company
Positive impact on community

39%

41%

19%

47%

9% 11%
26%

9%
Extremely Important

15%
11%

47%

28%

Very Important

36%

11%

Moderately important

28%

43%

11%

13%

Unimportant
9%
21%

50%
60%

19%


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C. PERCEPTIONS OF CORPORATE GOVERNANCE ACROSS INDUSTRIES
We divided the BSE 500 companies into a list of 17 industries, and asked investors to rank these
industries on the basis of their perception of corporate governance practices in these industries. We
have compiled investors’ responses and arrived at a final corporate governance rating of industries on
the basis of investor perception of corporate governance standards in these industries. The results are
shown below:
Industries with the best governance practices
 According to our respondents (institutional investors), the IT services industry has the cleanest
business practices. It has been rated as the industry with the best governance standards. It is
followed by FMCG and consumer products. Pharmaceuticals, Automotive, and Financial Services
round off the list of top five industries with best governance practices.
Industries with the poorest governance practices
 When asked to rate the industries with bad governance practices, Investors have overwhelmingly
picked real estate as the industry with the poorest governance practices.
Comment:
 Some of the characteristics that define the industries in the top five list are – foreign customers (IT,
pharmaceuticals and automotive), actively regulated (financial services), and vigorously
competitive (IT, FMCG and pharmaceuticals). There is also limited involvement of the government
in awarding contracts and approvals for business activities (especially in the IT industry), and
therefore it is difficult to turn connections into profits in these industries.
 On the other hand, real estate, infrastructure, mining and EPC are industries in which business
activities are inextricably linked with the need for regulatory approvals and it is easier to turn
connections into profits in these industries.
Industries with best governance practices: Top 5
IT Services

137

FMCG and Consumer products

121

Pharmaceuticals

52

Automotive

44

Financial Services

Composite governance score
based on ratings

35


Industries with poorest governance practices: Bottom 5
-26

Media and Entertainment

-29

Composite governance
score based on ratings

Engineering, Procurement and Construction

-58
-81
-151

Mining and metals
Infrastructure
Real Estate


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D. WHY GOVERNANCE MATTERS


We have combined the industry-level corporate governance ratings compiled from data reported by
the investors, with data of share price returns in these industries to try and see if there is a positive
correlation between the two. The universe of companies included in the study is BSE 500. These
companies have been grouped into the 17 industries whose CG score based on investors’ responses
is available. We have then used the median of the five year share price returns of the companies in
each industry as an indicator of share price returns of that industry.



Our linear regression model has the composite CG Score of the industry as the predictor variable,
and median five-year share price returns of the industry as the dependent variable. We find that
there is a significant positive correlation between median industry share price returns and our
composite CG score. The linear regression shows an R-square of 40%, implying moderate predictive
power in the relationship.



Our analysis shows that at an industry level, there is a correlation between corporate governance
levels and share price returns.

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E. CORPORATE GOVERNANCE PERCEPTIONS ACROSS COMPANIES


Investors were asked to rate the companies with the best corporate governance. The results
are presented below:

Companies with the best corporate governance

Source: IiAS Institutional Investor Survey 2014(Figures indicate percentage of total votes polled)

Companies with the best board composition

Source: IiAS Institutional Investor Survey 2014 (Figures indicate percentage of total votes polled)

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Highest ranking companies by impact on the community


Highest ranking companies by level of detail in regulatory filings


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F. CORPORATE GOVERNANCE ISSUES BASED ON DIFFERENT TYPES OF
OWNERSHIP AND MANAGEMENT
For the purpose of this section, we define five categories of companies based on their pattern of
ownership and management:







Promoter-managed companies: Companies where the top executive (whether
MD/CEO or executive chairman) is a representative of the promoter-family e.g.: Reliance
Industries, Bajaj Auto.
Promoter-owned, Professionally managed companies: Companies where ownership
and management is separated, where the MD/CEO is a professional, while the promoter
family representative holds only a seat on the company's board e.g.: Tata Group,
Mahindra group
Foreign owned companies: Companies which are the Indian subsidiaries of foreign
multinational corporations e.g.: HUL, Nestle, Bosch India etc.
PSUs: Public Sector Undertakings - companies where the government is a major
shareholder.
Institutionally owned and managed companies: Companies where the ownership is
widely dispersed and no family or foreign shareholder or institution has a majority
stake e.g.: ITC, HDFC, ICICI Bank, L&T etc.

What are the most important corporate governance issues in promoter managed firms?
Opaque related party transactions

76%

Risky mergers and aqusitions

54%

Poor accounting practices

52%

Excessive managerial remuneration

48%

Low dividend pay out
lack of strong leadership

37%
6%

Percentage of respondents rating the problem
as a major issue


What are the most important corporate governance issues in professionally managed
promoter owned firms?

45%


40%


34%


32%

Lack of strong leadership

13%
5%

Percentage of respondents rating the
problem as a major issue


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What are the most important corporate governance issues in MNCs?

58%


40%


30%


23%


10%


5%

Percentage of respondents rating
the problem as a major issue


What are the most important corporate governance issues in institutionally owned,
professionally managed companies?

61%


29%


26%


26%


10%


Percentage of respondents rating the
problem as a major issue

3%


What are the most important corporate governance issues in PSUs?

89%


20%


20%


17%


13%
0%

Percentage of respondents rating the problem
as a major issue


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

Corporate governance issues across types of companies: Investors consider lack of
strong leadership as the most important corporate governance issue in PSUs. In promoter
owned and managed and MNCs opaque related party transactions is the most important
governance issue while in professionally managed promoter owned companies’ and in
institutionally owned companies excessive managerial remuneration is the most important
governance issue.

Category

Dominant person

Concern

Promoter owned and managed

Promoter


MNC

Foreign promoter


Promoter owned professionally
managed

Managerial Executive


Institutionally owned

Managerial executive




As seen from the above table investors believe that corporate governance issues depend on
the type of dominant shareholder or person in control. It is perceived that promoter owned
and managed companies and MNC use related party transactions like royalty payments,
merger and acquisitions, transactions with wholly owned promoter companies.



In promoter owned and professionally managed and institutionally owned companies, the
management as the dominant person, reward themselves by way of remuneration including
stock options.

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G. ANALYSIS OF COMPANIES BY TYPE OF MANAGEMENT



The survey finds that professionally managed companies and MNCs have the highest
governance standards.
While promoter-managed companies account for 50% of all the companies in the BSE 500,
they received only 25% of the votes in favour of well-governed companies. Professionallymanaged firms, on the other hand, comprise 24% of the BSE 500, but they polled 54% of all
votes for well-governed companies. MNCs too, are over represented in the list of wellgoverned companies.

BSE 500 firms by category and vote share in the list of well-governed companies

Distribution of companies in BSE
500

Distribution of votes for
companies with good corporate
governance

50%

25%

24%

54%

Promoter

14%

4%

Professional

13%

18%

PSU

MNC


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SECTION 2: CASE STUDIES
This section seeks to understand investors’ perspectives on specific corporate governance
issues by polling their views on some of the most prominent case studies in corporate India and
the world over the last 12-18 months. The case studies are categorized into four broad themes:
i.
ii.
iii.
iv.

Executive appointments
Executive remuneration
Strategy and valuation
Shareholder activism

A. EXECUTIVE APPOINTMENTS
Institutions are divided about Narayana Murthy’s return to Infosys as executive
chairman
Narayana Murthy’s return to Infosys was one of the most hotly debated appointments this year.
While some saw it as a necessary act for a company in distress, others saw it as an instance of
poor succession planning, and a repudiation of corporate governance principles from one of the
best-regarded companies in India. Institutional investors seem similarly divided – around 51%
of them approve of the move while the other half disapprove of it. (It should be noted that the
resolution to appoint Narayana Murthy was approved unanimously).
Foreign institutions have disapproved, domestic institutions have approved:
Filtering the responses by type of institution (FII vs DII) reveals that foreign institutions do not
approve the move while domestic institutions are largely in favour of the move.
How did you assess the return of
Narayana Murthy to Infosys

51%

49%

How did you assess the return of
Narayana Murthy to Infosys

Domestic
institutions

Foreign
institutions

56%

44%

40%

60%

Approve - the company needs strong leadership
Approve
Disapprove


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Investors favour separation of the roles of chairman and CEO at JP Morgan
91% of investors believe having Jamie Dimon as both the CEO and chairman is bad for JP
Morgan: Corporate governance advocates usually vouch for a separation of roles between the
CEO and chairman – the former being answerable to the latter. In some cases, this can be
difficult or impractical to implement, and the perceived benefit of having the additional checks
and balances may be outweighed by the costs of slower decision making. JP Morgan’s recent
troubles with the regulators may have influenced this response wherein 91% of investors are in
favor of a separation of roles (CEO and chairman) at JP Morgan.
Jamie Dimon serves as both the chairman and CEO of JP Morgan. How do you view this?
9%

Bad for the company - concentrates too much
power in one man's hands
Good for the company - JP Morgan is exceptionally
complicated, only Jamie Dimon is capable of
understanding the risks and providing leadership

91%


Second-generation promoters’ appointment: Investors are neutral on to board at
a young age, more favourable to appointments in junior/ middle management






57% of institutions view second-generation promoter executive appointments on a case-bycase basis: 74% of the companies in the BSE 500 are promoter owned, and 50% of the
companies in the BSE 500 are promoter-managed. It is not surprising to see promoter’s
relatives joining boards at a young age.
Majority or 57% of the investors indicated that they are neutral to such appointments and
would view it on a case to case to basis. 38% of the respondents felt that such a move would
send a wrong signal to markets. It must be noted that in specific cases when such
appointments came to shareholders for approval they have been approved unanimously
(e.g. Sudarshan Venu in TVS).
Unanimous support if second-generation promoters are being groomed in junior or middle
management roles: It is worth noting that all respondents responded favourably for
promoter relatives joining the junior or middle management levels at a young age.

If a second-generation promoter joins the company board in an executive position at a
young age (below 30) how would you view this?
Negative - Sends a wrong signal to investors
38%
Positive - It is better for the company to have a
succession plan, than to have no plan at all

57%
5%

Neutral - View it on a case by case basis


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B. EXECUTIVE REMUNERATION
Remuneration is an area of concern for some institutions


Investors neither strongly support, nor strongly disfavor remuneration proposals,
irrespective of whether these are in promoter-driven firms or professional firms.



56% of the respondents view that payment of high salaries to promoters for managing their
own companies is justified provided they generate returns for shareholders. However 44%
of the respondents view such actions as sending send a wrong signal to markets and
employees as several of these companies also have a high ratio of executive compensation to
total staff cost.



Respondents view the remuneration to CXOs of professionally managed and institutionally
owned companies such as Larsen and Toubro in a similar way. While 46.6% of the
respondents felt that high remuneration to such executives should not be a concern, the
remaining 53.4% felt otherwise.



FIIs more concerned about remuneration in institutionally owned firms: Executive
remuneration has been a contentious issue in developed markets, where most firms are
institutionally owned, with several institutional investors using the say-on-pay provisions to
voice their disapproval on remuneration matters. This has been reflected in the response of
foreign institutions towards executive remuneration in institutionally owned firms. Over
71% of FIIs said that concerns may exist in case of remuneration in institutionally owned
companies.

How do you view executive remuneration in the following three types of firms?

Professionals in institutionally owned
companies

Professionals in promoter owned
companies

47%

53%

Not a concern
63%

37%
Concerns may
exist

Promoters in promoter-managed
companies

57%

43%


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C. STRATEGY AND VALUATION
If a mid-sized company embarked on a business
diversification - to unlock the next stage of growth,
how would you view the move?

Generally approve

48%

53%
Generally disapprove

If a mid-sized company embarked on a
business diversification - to unlock the next
stage of growth, how would you view the
move?

DIIs

FIIs

51%

49%

47%

Generally
approve

Investors divided over companies’ business
diversification:
We find that majority of the investors surveyed
do not have a problem with the idea of
companies venturing into new areas of business
as 52.5% indicated that they would generally
approve such resolutions. However, the
remaining 47.5% indicated that they would
disapprove of such a move.

FIIs oppose diversification:
FIIs came out a little more strongly in
disapproval of business diversifications – with
53% of foreign investors responding that they
view such diversifications negatively.
Recently, Infotech Enterprises and KPIT
Technologies announced plans to diversify –
Infotech Enterprises to enter the manufacture of
electronics systems and other businesses, KPIT
Technologies to start manufacturing of
electronic and mechanical goods.

Generally
disapprove

53%

Shareholder approval for transformational
acquisitions – a major area of concern:

When a company is trying to make a
transformational acquisition, should it be
mandatory to take shareholder approval?
9%
Approval should be
mandatory
Approval should not
be mandatory
91%

The recent announcement of Apollo Tyres’
acquisition of US-based Cooper Tire & Rubber
Company sent the share prices of the company
downhill, unsurprisingly so, given that the allcash transaction deal was at a 40% premium to
Cooper's 30-day volume-weighted average price
on the NYSE. Apollo Tyres did not require a
shareholder approval because the deal was a
cash transaction.
We polled investors, on whether such
transformational transactions should be put to
shareholder approval and over 90% of the
investors indicated that the approval should be
made
mandatory
for
transformational
acquisitions, irrespective of whether they are
cash transactions or not.

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D. ROYALTY
Royalty payments to be linked to sales growth/profits


In the report titled ‘Paying the price: Multinationals, Royalty Payments and Minority
Shareholders’, IiAS highlighted that royalty and related payments increased by 23.8% to
Rs.4952 Cr in FY13 for 25 MNC companies used in the analysis. Of these, five companies Maruti Suzuki, Hindustan Unilever, Nestle India, Bosch and ABB India, remitted Rs.3979 Cr
in FY13.



76% of the investors indicated that royalty and related payments are not a concern
provided they are linked to sales growth or returns on invested capital. Currently, most
companies charge royalties at a flat rate to total turnover or net sales.



While 15% of the investors indicated that some form of check should be put up so
companies are not free to increase royalty rates, 9% felt that a liberal royalty regime is
essential to encourage foreign investment into the country.

Foreign owned companies have been increasing their royalty paid to parent companies. How
do you view this move?

15%

9%

Liberal royalty regime is essential to
encourage foreign investment
Royalty hike should be correlated with
sales growth/ returns on invested capital

76%

Companies should not be given the
freedom to hike royalty payments


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SECTION 3: SHAREHOLDER ACTIVISM
Would you consider initiating or joining a class action
suit against a company to address your grievances?

34%

Strong support for shareholder
activism, class action suits:
The Companies Act 2013 provides for
filing class action suits against
companies. Two thirds
of the
respondents indicated that they would
initiate such actions against the company
for the grievances they may have while
the remaining stated they will not.

66%

Yes

No


Do you support activist investors when they raise
what they perceive as corporate governance
concerns?

15%

Activist shareholders raising governance
issues find support:
During 2012, The Children’s Investment Fund
filed a lawsuit against Coal India for
mismanaging the company.
85% of the
respondents indicated that they support such
moves by activist investors when they raise
corporate governance issues. Only 15% of the
respondents stated that would not support
activist investors on companies’ governance
issues.

85%

Yes

No


How do you view activist investors when they give
strategic recommendations to companies?

Activist investors are within
their rights to make such
recommendations

27%

73%

Activist investors who have
never run businesses in these
industries have no right to
make such recommendations

Activist shareholders making strategic
recommendations find support too:
Recently, Dan Loeb advised Sony to spin off its
entertainment business. On another instance,
Nelson Peltz demanded that Pepsico
restructure its business into two companies beverages and snacks. When polled for their
views on such issues, institutional investors
have indicated that they are broadly in favour
of letting shareholders make such strategic
recommendations. 73% of respondents are in
favour of allowing activist shareholders make
strategic recommendations, while 27%
believed that people who have not run
companies in these industries have no right to
make these recommendations.

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SECTION 4: OPINION ON REGULATORY INITIATIVES OF THE
COMPANIES ACT 2013 AND THE SEBI REGULATIONS
2013 saw a sweeping overhaul of the most significant piece of legislation that governs Indian
companies – the Companies Act. Several regulatory initiatives have been introduced pertaining
to corporate governance, including an explicit definition of ‘independent director’, among
others. SEBI too has sought to revamp clause 49 of the Listing Agreement. This section seeks to
understand the responses of investors towards these regulatory initiatives. The broad areas
covered in our questions include:
i.
Independent directors
ii.
CSR mandate
iii.
Auditor rotation
iv.
SEBI Schemes of arrangement

A. INDEPENDENT DIRECTORS
Support for restrictions on tenure, outside directorships, and compulsory training for
independent directors point towards investors’ expectations from independent directors not
being met. Support for compulsorily having women directors on boards is weaker, but still
above 50%.
How do you view the regulatory initiatives pertaining to independent directors in the
Companies Act?

Restriction on outside
directorships
Restriction on maximum
tenure
Training - independent
directors
Mandate for women
directors on boards

83%

2%

82%

18%

69%
51%

16%

9%
21%

22%

Approve
Do not approve
No opinion

28%

Restrictions on tenure: The new Act restricts the
maximum tenure of an independent director to
ten years. More than 80% of investors have
approved of this proposal, confirming the view of
governance experts that extended tenure
compromises the independence of directors.

Training for independent directors: Nearly
70% approved of a proposal to provide
independent directors with training and a
certification program. This proposal has been
proposed by SEBI in a consultative paper on
corporate governance.

Restrictions on outside directorships: Again,
more than 80% of investors approved of the new
Companies Act proposal to restrict the maximum
outside directorships to ten public companies.
Investors want the independent directors to bring
more focus and see as less as being more.

Mandate for women directors on boards: The
Companies Act mandates all listed companies to
have at least one woman director on board. While
51% of the investors support this view, a
substantial 21% do not see any merit; 28% did
not express an opinion. The dearth of women
candidates may possibly explain this.

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24

B. CSR MANDATE
The business of business will no longer just be business


Among the various sections of the Companies Act 2013, Clause 135 has generated the most
debate. The Clause 'mandates' spending on CSR to the extent of at least 2% of average net
profits during every block of three years for companies above a certain financial threshold.



84% of the investors have approved of CSR. The support for mandatory CSR however, is
much weaker – with only 36% of investors openly supporting the move.



IiAS found that during FY13, the 51 companies included in the BSE S&P Sensex or the
Nifty50 indices, spent Rs.26.6 bn towards CSR activities. This, at an average, accounts to 1%
of average PBT of the preceding three years of these companies.

Do you support the mandatory CSR spend (2% of profits) proposed by the Companies Act
2013?

16%

Support CSR - but it should not
be mandatory
48%

36%

Support mandatory CSR
Do not support CSR


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25

C. AUDITOR ROTATION


To recap the debate, critics of mandatory rotation highlight increasing costs and declining
efficiency as their primary objections to any form of mandatory rotation. They argue that
the replacement costs for auditors will become significantly high and far outweigh any
transparency benefits that may result from the change. In addition, they claim that
businesses nowadays are far more complex and the audit process requires a fair degree of
familiarity with the internal processes, systems and key risk areas of the company. Periodic
rotation therefore will not achieve the intended results and conversely, may end up
reducing the audit quality.



Corporate governance advocates however, feel otherwise. They believe that vintage
auditors tend to develop a certain level of comfort with the company management, thereby
compromising the integrity of the audit process. They feel that mandatory rotation will not
only bring a fresh perspective on the financials, it will also keep the current auditors on
their toes as they will be aware that a new auditor may detect any irregularities in the
accounting process. Richard Breeden, a former head of America’s Securities and Exchange
Commission, has put it, “When the same incumbent firm has been in place for 100 years, to
me that’s not an audit, that’s a joint venture.”



Overwhelming support for auditor rotation: Over 90% of the respondents have
approved of the auditor rotation requirement of the Companies Act – stipulating that
auditors must not hold tenure of over ten consecutive years at a listed company. Extended
audit tenure may compromise independence, and the responses show the depth of investor
concern about the relationship between companies and auditors

Do you support mandatory auditor rotation as proposed by the Companies Act 2013?

5% 3%
Approve
Do not approve
No opinion
91%

IiAS Survey 2014

26

D. SEBI: SCHEME OF ARRANGEMENT


95% of investors support the new SEBI regulations pertaining to Schemes of
Amalgamation: The requirements mandate that promoters cannot vote when they are an
interested party in the transaction. This means that such Schemes cannot be approved
unless a majority of non-promoter shareholders vote in their favour. Given the opacity of
related-party transactions in Indian business, this proposal has been welcomed by an
overwhelming 95% of then investors.



Investors have already begun to act. A recent postal ballot to approve the merger of SEPR
Refractories India Limited, Saint-Gobain Crystals and Detectors India Limited, and SaintGobain Sekurit India Limited with Grindwell Norton Limited was voted ‘against’ by a
majority of minority investors.



The Companies Act, 2013 has also placed restrictions on related party transactions. It has
listed a set of items where a special resolution in the general meeting for undertaking RPT
will be required. Further no member of the company can vote on such resolution, if such
member is a related party.

Do you approve of the new SEBI requirement for Schemes of Amalgamation - mandating
approval from majority of non-promoter shareholders?

5%
Approve
Do not approve
95%

E. OTHERS


Increase in borrowing limits: Increasing their borrowing limits allows companies to
carry out their strategic plans for the company without making adequate disclosures
and taking permissions from shareholders. While enabling proposals to raise equity are
valid for only a year, proposals to increase borrowing limits are valid perpetually. 71%
of investors agree that debt resolutions should have a one year time frame

Resolutions to raise equity are valid only for a year. Should a similar time limit apply for
borrowings?
9%
20%
71%

Agree
Disagree
No opinion

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27

F. OVERALL RESPONSE TO COMPANIES ACT AND ITS EXPECTED IMPACT
ON GOVERNANCE OF COMPANIES


Overall response to proposed regulations is mixed: While a majority of respondents
(54%) has stated that the Companies Act is sufficient to address corporate governance
concerns, a large number (40%) has stated that it is insufficient. In contrast 6% of the
respondents took a diametrically opposite view: the regulation is excessive.



This scepticism may be because of the notion that the new regulations may inspire only a
tick-the-box approach towards compliance and governance rather than far-reaching
transformation.

Do you believe the Companies Act 2013 will help improve corporate governance in
companies?

6%
Sufficient to address corporate
governance concerns
40%

54%

Not sufficient to address
corporate governance concerns
Excessive regulation


IiAS Survey 2014

28

SECTION 5: INVOLVEMENT IN GOVERNANCE OF PORTFOLIO
COMPANIES
This section seeks to understand how investors engage with companies in their portfolio, from a
governance perspective. This section is divided into two parts:
i. Shareholder resolutions
ii. Engagement with companies and other participants

A. SHAREHOLDER RESOLUTIONS


Takeovers, mergers and acquisitions are rated as the most critical shareholder proposals.
Not surprising given the uncertainty. These are followed by other strategic proposals like
disposals and spin-offs, intra-group mergers and related party transactions.

Which category of resolutions do you find most critical?
Takeovers, mergers and acquisitions external

66%

Intra-group mergers, intra-group loans
and other related party transactions

30%

60%

Disposals and spin-offs

55%

Entering new line of business

31%

53%

43%

2%
4%
0%
Extremely important

Issue of preferential warrants

39%

31%
46%

11%
9%7%

Very important
Neutral
Somewhat important

Re-pricing of stock options

37%

Board Appointments

36%

36%

23% 5%

Appointment of relatives of Promoters
in Executive ranks

33%

42%

16% 9%

40%

14% 9%




The list of resolutions most frequently voted against is slightly different, led by related party
transactions. This indicates that while investors recognize the high risks with mergers and
acquisitions, they are willing to let management follow through on their proposals. Intragroup mergers, and related party transactions, on the other hand, are viewed with greater
suspicion. ESOP proposals are also frequently voted down – due to concerns on dilution and
impact on profitability.



The main issue being raised about mergers and acquisitions is the valuation.

IiAS Survey 2014

29

Which category of resolutions are you most likely to vote against?
Intra-group mergers, intra-group loans and
other related party transactions

29%

Entering new line of business

27%

Grant of Employee Stock Options at a steep
discount

26%

Disposals and spin-offs

24%

65%

11%

Often vote
against

24%

68%

8%

Sometimes
vote against

Takeovers, mergers and acquisitions external
Increase in borrowing limits, issue of debt
instruments
Re-pricing of stock options
Unusually high /low payment of dividend

24%
24%
19%

58%

13%

57%
47%

43%

16%
26%

32%

53%
43%

Never vote
against

24%
38%


What is the main concern in mergers and acquisitions?

Valuation

86%

Dilution

Method of the merger

39%

31%

Percentage of respondent
citing the factor as a major
issue


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30

B. ENGAGEMENT BETWEEN MARKET PARTICIPANTS AND COMPANIES
Do you talk to other institutional
investors on critical issues before
voting?

A majority of respondents have stated that
they occasionally consult with other
institutional investors on critical issues
before voting. Only 21% of the survey
participants have never consulted with
other institutions on critical issues before
voting.

18%

21%

Always
Sometimes
Never

62%

How often do you meet the senior management of your investee companies?
For companies where
shareholding is below significant
threshold (below 3% of
company's stake/below 5% of
asset size)
For companies where
shareholding is above significant
threshold (above 3% of
company's stake/above 5% of
asset size)

14%

32%

22%

32%

Every month
Every quarter
Every six months

22%

53%

17% 8%

Less than one
meeting per year






Frequent engagement (monthly or quarterly basis) for significant investments: For
investments above their significant threshold, 75% of the investors met their companies’
senior management either on a monthly or quarterly basis (outside of earnings calls and
other conferences)
Occasional engagement (quarterly or half yearly basis) for smaller investments: On
the other hand, for smaller investments, the meetings with management were less frequent
– with as much as 32% of investors not meeting their investee company even once in a
year.

More than 50% of investors willing to engage with company directly or indirectly: When
faced with a company proposal that they disagree with, nearly 60% of the respondents are
willing to engage with the company – either directly (42%) or indirectly after aggregating other
institutional shareholders (17%). However, a sizeable share of the respondents (28%) said that
they would exit the company.
Voting with your feet need not be the only option: 23% of institutional investors indicated
that companies have responded positively when governance issues have been raised when a
majority did get some kind of a response. Investors may be better advised to actively drive
corporate governance in their investee companies rather than stay passively invested or vote
with their feet.
IiAS Survey 2014

31

What has been your experience when you have attempted to drive corporate governance
in investee companies?

The company has responded on select
issues

17%

Company has responded positively
23%

60%
The company has not responded

How do you respond to a company's proposal that you disagree with?

3%

6%
Engage with the company and try to reach a consensus

6%

Aggregate other institutional shareholders and engage the company
42%
28%

Exit the company
Write to independent directors

17%

Work with regulatory bodies
Work with proxy/voting advisory firms

IiAS Survey 2014

32

SECTION 6: SHAREHOLDER ENGAGEMENT AND THE ROLE OF PROXY
ADVISORY FIRMS
Still in a nascent stage


Proxy advisory firms are the new players in the field yet a quarter of all respondents said they
seek help from proxy advisory firms on a regular basis. This is in large part on account of the
presence of international money managers, who often have these firms hard coded into their
voting guidelines. Three times this number either don’t use the services of such firms or use them
occasionally.



The feedback from institutional investors is that shareholder engagement is still in its early days in
India. While there have been a number of cases where investors have taken a stand and decided to
vote against proposals rather than exit their companies, a majority of institutional investors still
prefer to vote with their feet and exit their investments. Other obstacles for shareholder activism
include the lack of a supportive regulatory mechanism for legal redress, and a fear of being denied
management access, or being termed as negative.

Do you seek help from proxy advisory firms to finalize your voting decision?
7%
Never

19%
43%

Sometimes
Often
Always

31%


Why are institutional investors in India not as active as they are internationally?
Activism is still in its evolution stage

85%

Institutional investors prefer to exit the investment

51%

Being denied management access

45%

Regulatory mechanism discourages activism

38%

Investors fear being viewed as being negative

34%

Investee companies will not invest in debt funds

19%

Indian companies rank high in governance

6%

Institutional investors are fairly active in India

6%


IiAS Survey 2014

33

CONCLUSION
Institutional investors see corporate governance as an important criterion for investing and an
important determinant of share-price returns. More than three-fourths of the survey respondents
believe that well-governed companies will always command a valuation premium respective to their
peers in the industry. Our study of perceptions across industries reveals IT services and FMCG as the
industries with the best governance practices, while real estate ranks lowest in the perception of
investors. Our analysis of the relationship between the perceptions-based industry corporate
governance score and median industry share price returns (5 YR) demonstrates a significant
relationship between the two. Higher corporate governance is correlated with higher share price
returns.
The best-governed companies, according to investor perceptions, include Tata Consultancy Services,
Infosys, HUL, HDFC and HDFC Bank, Mahindra and Mahindra, and Nestle among others.
Professionally-managed companies and MNCs feature more prominently in this list, as compared to
promoter-managed firms or PSUs.
Investors have shown strong support for shareholder activism, with nearly three fourths of investors
taking the view that shareholders are within their rights to make strategic recommendations to their
companies.
Investors have supported many specific regulatory initiatives pertaining to independent directors and
auditors introduced in the Companies Act. They are also unanimously in approval of the new SEBI
regulations that mandate approval from a majority of the non-promoter shareholders for Scheme of
Amalgamation with related party. The overall response to the proposals of the Companies Act is less
optimistic with around 40% of respondents saying that the regulations may not be sufficient to
address corporate governance concerns.
External takeovers, mergers and acquisitions emerged as the most critical issue among corporate
actions concerning investors. However, the most frequently opposed corporate actions are intragroup mergers and other related party transactions. This indicates that although investors perceive
high risks in mergers and acquisitions, they are willing to let management follow through on their
plans; they are more questioning of related party transactions.
Nearly 80% of investors have consulted with other institutions on critical issues, while more than a
quarter of respondents said they seek advice from proxy advisory firms on a regular basis. While
nearly 60% of respondents are willing to engage with a company to address concerns regarding
corporate governance issues, a sizeable 28% of respondents said they would rather exit their
investment in such cases. All these data points indicate that shareholder engagement is still in a
nascent stage in India.

IiAS Survey 2014

34

PROFILE OF SURVEY PARTICIPANTS
Type of institutions
Mutual fund
3% 3% 1%
7%
7%

Equity House
Private Equity fund
30%

Others - family office etc
Bank

10%

Retail Investor
18%

Insurance company

21%

Hedge Fund
Sovereign Wealth Fund

Break-up of domestic and foreign funds

39%

Domestic
61%

Foreign


IiAS Survey 2014

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IiAS Survey 2014

36

About Reliance Capital Asset Management
Limited
Reliance Capital Asset Management Limited
(RCAM) is the Asset Manager to Reliance
Mutual Fund (RMF), which is one of the largest
Mutual Funds in India.
RCAM is primarily engaged in the activities of
Investment Management and it also renders
Portfolio management services.
RMF offers a well-rounded portfolio of
products across various asset classes including
equity, debt and gold in order to meet varying
requirements. RCAM constantly endeavors to
launch innovative products and customer
service initiatives in order to enhance value for
its investors.
RCAM is part of Reliance Capital, one of India's
largest financial services companies. Reliance
Capital has interests in various businesses
including asset management, life insurance,
general insurance, private equity, stock
broking, distribution of financial products, and
consumer and industrial finance.

IiAS Survey 2014

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IiAS Survey 2014

38

DISCLAIMER
----------------------------------------------------------------------------------------------------------------------------------This document has been prepared by Institutional Investor Advisory Services India Limited (IiAS). This
document is provided for assistance only and IiAS shall not be in any way responsible for any loss or damage
that may arise to any person from any inadvertent error in the information contained in this document. The user
assumes the entire risk of any use made of this information. The discussions or views expressed may not be
suitable for all investors. This document should not be reproduced or redistributed or passed on directly or
indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This
document is not directed or intended for distribution to, or use by, any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication,
availability or use would be contrary to law, regulation or which would subject IiAS to any registration or
licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be
restricted by law, and persons in whose possession this document comes, should inform themselves about and
observe, any such restrictions. The information given in this document is as of the date of this document and
there can be no assurance that future results or events will be consistent with this information. This content is
subject to change without any prior notice. IiAS reserves the right to make modifications and alterations to this
statement as may be required from time to time. Neither IiAS nor any of its affiliates, group companies, directors,
employees, agents or representatives shall be liable for any damages whether direct, indirect, special or
consequential including lost revenue or lost profits that may arise from or in connection with the use of the
information. All layout, design, original artwork, concepts and other Intellectual Properties, remains the
property and copyright of IiAS and may not be used in any form or for any purpose whatsoever by any party
without the express written permission of the copyright holders.

IiAS Survey 2014

39

IiAS Survey 2014

40

Markets

Governance

Where Markets Intersect Governance
About IiAS
Institutional Investor Advisory Services India Limited (IiAS) is a proxy advisory firm, dedicated to
providing participants in the Indian market with independent opinion, research and data on corporate
governance issues as well as voting recommendations on shareholder resolutions for over 300
companies.
IIAS provides bespoke research, valuation advisory services and assists institutions in their
engagement with company managements and their boards.
To know more about IiAS visit www.iias.in
Institutional Investor Advisory Services
15th Floor, West Wing,
P J Tower, Dalal Street,
Fort, Mumbai - 400 001
India.
Contact
solutions@iias.in
T: +91 22 2272 1570-3
F: +91 22 22721574
For Subscriptions:
Please write to us at solutions@iias.in
or login to our subscription module

IiAS Survey 2014

41

IiAS Survey 2014

42

CONTACT US
Institutional Investor Advisory Services Limited (IiAS)
15/F West Wing, PJ Tower, Dalal Street, Fort, Mumbai 400 001
Tel: +91 22 22721570 – 3 | Fax: +91 22 22721574
Website: www.iias.in

IiAS Survey 2014

43

IIAS Investor survey 2014

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