Corporate Governance Practices

Current and Future

April 18, 2016

Shriram SubramanianINGOVERN RESEARCH SERVICES PVT. LTD.

News – Fact or Fiction?

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TCI files a law suit against Coal India and its Directors

Narayana Murthy joins Infosys Board as Executive Chairman – June 2013. He

becomes Chairman Emeritus – June 2014

Amnesty slams Vedanta -exposes gross human rights violations

by company in Orissa, India

WSJ: Shareholder Activism Meets BollywoodEros International has become a target for

London’s Knight Assets

Tata Motors shareholders reject proposals for Waiver of Excess

Remuneration

Spotlight on CG Topics since 2010

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Director Attendance

Multi Boarding

Tenure of IDs

Auditor & Partner Tenure

Auditor Compensation

Compensation

Stock Based Compensation

Single Resolution for Appointment of 2 Directors

Single Resolution for Compensation of Directors

Disclosures

Related Party Transactions

Royalty Payments

M&A Valuations

2011 AGMs – Investor Engagement

Resolutions put to vote by show of hand and passed unanimously

46 companies didn’t submit “Outcome of AGM” to exchange

Even when Outcome was submitted, “Minutes or Proceedings of AGM” is not given

For 31 companies, Chairman of Board not present at the AGM

For many companies, Audit Committee Chair not present at the AGM

In most AGMs, shareholders didn’t ask queries on any resolution

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Key Developments for Investors

Domestic mutual funds report how they vote from FY2010-11

Public holding in listed companies > 25%

Regulations by MCA and SEBI

Increasing activism by institutional investors

Voting Infra - eVoting

Proxy Advisory Firm – InGovern – making Vote Recommendations

Companies report voting patterns at shareholder meetings

Case Study: Tata Motors

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June 2014: Proposals for waiver of excess remuneration to

Two Executive Directors and former Managing Director

Proposals rejected by shareholders

Reaches out to shareholders and proxy advisory firms

January 2015: Re-tables the resolutions with detailed

explanation

Routine Proposals not passed by shareholders

CG in India: Current State

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Explanations to proposals are now Detailed & Informative

Companies reach out to investors for passing proposals

Companies engage with proxy advisors to understand investors’ concerns

Companies hire consulting firms to diagnose their existing corporate governance practices and enhance CG edifice

Companies avoid contentious proposals

Investors are more active in voting

Investors are proactively voicing concerns

Traits Across 4 Categories of Companies

Government-owned companies

Promoter-dominated companies

Listed subsidiaries of MNCs

CEO-led widely-held companies

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InGovern Report on India Proxy Season 2015

CG in India: Current State

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InGovern Report on India Proxy Season 2015

Proxy Season 2015 – Contentious Resolutions

Sl Company Name Resolution(s)

1 Siemens LtdSale of Metals Technologies Business to Promoter

Entity

2 United Spirits Ltd 6 Resolutions for Related Party Transactions

3 IVRCL Limited Conversion of Debt of CDR Lenders into Equity Shares

4 Yes Bank LtdAppointment of an Independent Director due to

attendance concerns

5 JSW Holdings Ltd 4 resolutions for Related Party Transactions

6Apollo Hospitals

Enterprises Ltd

3 resolutions for re-appointment of Exec. Vice

Chairman, MD and Joint MD for sketchy disclosures

7 Adani Ports & SEZRe-appointment of a Director who retires by rotation,

intercorporate investments, related party transactions

Case Study: Maruti Suzuki

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SMC

MSIL100% Sub of SMC

100% 56.2%

Sale of Vehicles

Lease of land &providing assistance

Case Study: Maruti Suzuki

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January 2014: Maruti announces its proposal to let Suzuki setup manufacturing plant at Gujarat and sell the cars to Maruti

March 2014: The Company changes certain terms of the agreement to make it more beneficial to Maruti

April 2014: The Companies Act 2013 requires shareholder approval through Special Resolution with promoters abstaining

Apr 2014 – Dec 2015: Company appoints IB – Axis Capital – for road shows and meets investors and proxy advisory firms

May 2015: The Companies Act amended – RPTs voting changed from Special to Ordinary

Dec 2015: Maruti tabled the proposal with new terms

Case Study: Vedanta–Cairn Merger

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June 2015: Vedanta and Cairn India announce plans for merger

Swap ratio: 1 equity share & 1 pref. share of Vedanta for 1 equity

share of Cairn India

Proxy advisory firms and Shareholders voice concerns for Cairn India

shareholders over swap-ratio, socializing of debt of Vedanta, human-

rights issues, tax liabilities, etc.

Both companies reach out to proxy advisory firms and shareholders

LIC and Cairn UK - key non-promoter shareholders of Cairn India

Likely - change in terms of merger??

Case Study: Infosys

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March 2016: Infosys tables proposals:

stock incentive schemes appointment of IDs extension and compensation of its MD

Company engages with proxy advisory firms

Some proxy advisory firms recommend voting against stock

incentive schemes and appointment of ID

Company puts out explanation - rationale behind the proposals;

disagreeing with proxy advisory firms

Voting Analysis

some investors vote against some proposals only 23% of Promoters vote FOR extension and compensation of

MD and appointment of ID

International Trends

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concerns over the variable pay of chief executive Stuart

Gulliver, which exceeded 200% of his salary.

his benefits package – worth 50% of salary – “excessive

and inappropriate”

60% of shareholders reject Bob Dudley’s £14m package

”surge in shareholder activist campaigns directed at corporate America”

Fallen well short of the environmental commitments it made at last year’s meeting

Future: Boards and Shareholders

Board Meetings

Committee Meetings

Financial Reporting

Non-Financial Reporting

Disclosures

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Why reach out to shareholders?

Why meet? Why vote?

CG Evolving: Pay Ratio Disclosure

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Companies Act on Pay-ratio Disclosures

Disclose Director & KMP compensation

Disclose the ratio between Director Compensation to Median Employee

Remuneration

Disclose increase in Compensation vis-à-vis Financial Performance and logic

InGovern Report on Pay-ratio Disclosures: Nov 2015

Key findings of the report:

Avg Compensation of Nifty EDs: Rs. 9 Cr

Median Employees Rem: Rs. 5 L

Avg Ratio of Dir-to-Employees: 170

70% highest paid EDs are Promoters

Institutional Shareholders

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Future: Shareholder Activism

Engage with companies

Voice Opinion / Public Outrage

Demand Change in directors, management, capitalization, ownership structure, operations

Get Board Seats

Get Shareholder Proposals passed

File Court Case

File Class Action Suit

Takeover Company

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CG Topics – Spotlight in Future

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Compensation

Board Diversity

Board Evaluation

Capital Allocation

Shareholder Proposals

Activist Shareholders

Climate Change

Water Management

Social Rights

Hindering Activism

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Hostile Takeovers

Benign Lenders

Legal Hassles

Regulatory Enforcement

Case Study: Coal India Limited

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• The Children’s Investment Fund of UK (TCI) dragged Coal India (CIL) & its Directors to Court over its functioning & disparity in coal-pricing wrt international & private players.

• At that time, TCI held ~1.5% of CIL & was its biggest institutional investor.

TCI was unsuccessful in suing CIL & finally began offloading its shares

TCI also expressed reservation in investing in India again

Activism – Coal 4 India

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David vs Goliath?

Why should Coal India care?

Why should Govt. of India care?

Why should investors care?

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Case Study: Norway’s GPFG

Norway's Government Pension Fund Global excludes 52 coal companies

– not to invest in CESC, Coal India, NTPC, Reliance Power, Reliance Infrastructure, Tata Power

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Case Study – LIC’s stake in ITC

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ITC: ~60% of revenue and ~80% of profits from cigarettes.

LIC is the 2nd biggest shareholder of ITC with 13.12% stake.

LIC stake is worth ~Rs. 33K Cr.

LIC also has stake in other cigarette manufacturers - VST

Many NGOs have protested against LIC’s investment decision

Govt spends >Rs. 10K Cr. for treatment of tobacco-related diseases

Logo – Protecting ‘Life’ or Destroying ‘Life’?

Should LIC continue to invest in ITC?

Enhancing Corporate Governance Edifice

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Ensure honesty

Prevent profiteering

Eliminate conflicts of interest

Regulate related party transactions

Disclose - bad news

Allocate capital efficiently

Engage with all stakeholders

Build TRUST

Corporate Governance PracticesCurrent and Future

Shriram SubramanianINGOVERN RESEARCH SERVICES PVT. LTD.

shriram@ingovern.com

Thanks