Investor Activism by Mutual Funds

The Frustrated Minority Shareholder

This post is out frustration with the Capital Market, every day i keep hearing news about company failures wrong acquisitions and over priced IPO's. is in there any good Investor protection association in the country that can fight on behalf of us the shareholders. SEBI as usual is always the last one to react and whatever said and done as a minority shareholder I have lost my money. SEBI has never bothered to compensate me for funds i have lost or for the loss of my income. nor there has been instances were company board of directors have been taken to court for their laxity. 

My Problems are 

1. Over priced IPO's and a whole set of merchant bankers supporting it for their private gains. 

2. High Paying CEO's entry and exit and in the process leaving the company in shambles without taking responsibility for the value destruction, is there no one to take them to task.

3. Star Fund Mangers leaving fund houses and with them the NAV's also tumble and Fund Mangers who have been rash in their stock picks and hence led to heavy investor loss. 

4. mergers, acquisition, stake sale, institutional bidding etc. as minority shareholder do i have a say. why don't i get preferential allotment of shares or even rights issue. why only the top management gets it at heavily discounted prices.

5. Balance between promoter holding and minority commercial holdings who will take care of my interest the minority shareholder. 

I feel sad in being a poor retail investor. every single institution is talking about how important is the retail investor to the equity markets yet so little has been done to protect our interest or to bring the culprits to justice for eroding our wealth. 

Laws have come in place partially but point is information is not widely published. powers given to shareholders is not known and hence the big corporate moghuls take small time investors for a ride. 

“The US has the most liberal of laws when it comes to shareholder activism,” Anybody who owns ₹80,000 worth stocks, which is held over a one-year period, can force agenda into annual shareholder meetings. In the UK, you need the support of at least 100 similar groups to force an agenda into meetings. And in developing countries such as India, the rules are not even there or just evolving. I am not saying institutions or investors have not stood up against corporate miscreants. one of the earlier examples would be Grasim's take over offer for L&T. Securities Appellate Tribunal’s (SAT) decision not to vacate the market regulators’ stay on Grasim’s open offer for Larsen & Toubro shares at Rs 190 each had taken most of us by surprise. Another instance was when Reliance Mutual fund questioned Novartis about its inter group transfer of funds and why it had given loans to group companies at cheap rates. other examples would be Satyam-Mytas deal, cairn, Bank of Rajastan-ICICI etc. 

The truth is investor activism has always lagged behind if shareholder activism can be spearheaded by Institutional investors it could bring a huge difference to the corporate accountability. Intuitions like mutual funds should actually take it on themselves to fight corporate miscreants. A recent SEBI circular has given some push in regard which states "Asset management companies (AMCs) shall disclose their general policies and procedures for exercising the voting rights in respect of shares held by them on the website of the respective AMC as well as in the annual report distributed to the unit holders from the financial year 2010-11.

The sad fact is process is slow and information regarding the proceedings is always covered up and not disclosed fully. If u see Canada’s mainstream mutual funds have had a reputation as the most passive of institutional investors, (compared to the developed markets like US. Germany & London) rarely publicly objecting to companies’ activities and seldom taking the lead to vote against unpopular proposals. But signs of activism are emerging in that conservative realm. Mutual funds are now outpacing the broader pack of shareholders in voting against management compensation proposals, and in supporting resolutions from activist investors, according to a new study released. The report found mutual funds’ support for shareholder resolutions climbed from 3.2 per cent in 2006 to 21.1 per cent in 2009. And support for management proposals on compensation – most involving approvals for new stock option grants – slipped from 81 per cent to 75 per cent in the same period. A flood of shareholder resolutions asking companies to give investors an annual advisory vote on executive compensation practices – known as say on pay – have attracted broad shareholder support in the past two years, boosting overall support for shareholder resolutions across the ranks of investors. Say on pay proposals submitted at Canada’s biggest banks garnered 63 per cent support from mutual funds in 2008 and 74 per cent in 2009. Mutual funds have also begun to much more widely support shareholder resolutions on environmental and social issues. 

In the US shareholder activism has gone to such an extent that there are times were in the CEO's of big companies had to put down their papers. like the case were Home Depot CEO, Bob Nardelli had to resign because Ralph Whitworth, who is a part of the USD 7 billion Relational Investors fund, was insisting that the stock price is not going up. Then he acquired nearly 1.5% of the stock and forced the CEO to quit and finally he resigned. 

My point is Mutual Funds, Insurance companies and other Private Equity companies should increasingly start making use of their voting rights and keep the interest of minority shareholders. the SEBI should start investor compensation for frauds and price rigging which will bring some relief to the shareholders. SEBI should increase its purview to include company CEO's Mutual Fund managers and promoter mismanagement of funds.