Rethinking how promoters handle dissent can empower shareholder democracy

The ownership structure of Indian companies has had an outsized influence in shaping the country’s corporate governance. For starters, around 65 per cent of companies in the BSE100 are family-owned and family-run. This number only goes up as you move beyond the frontline indices. The data from the Nifty 500 too backs this up — promoters held 54.5 per cent of equity back in December 2015, which rose to 58.9 per cent by June 2020. Today they own about 51 per cent. While this is a drop from the peak, it is still more than what institutional investors and all other shareholders combined hold. 

Given the concentrated ownership and control, external investors are willing to invest only when they can trust the company’s governance and leadership. Since governance is essentially the outcome of interaction among regulators, the board, management, shareholders, and broader stakeholders, the role of regulation becomes crucial in ensuring balance and accountability across these relationships. In the Indian context, a few things stand out. 

  One is the limited delegation of authority to the board. With a dominant shareholder often present on the board, regulators have taken a view that key decisions should rest with shareholders rather than the board. As a result, shareholders are called upon to vote on a wide range of matters — from major decisions like fund raising, business restructuring, and amendments to charter documents, to relatively minor items with minimal financial impact, such as the appointment of a secretarial auditor or waiving postal charges for sending documents. By one count, there are more than 30 distinct items that require shareholder approval before the board can proceed. This stands in stark contrast to markets like the United States, where shareholders delegate significant authority to the board, which decides and acts.

  Another guardrail that regulators have in place is that as all shareholders, including the promoters, have the vote, there are thresholds for decisions to get approved. Some are approved by way of an ordinary resolution. These need more votes to be cast in their favour than against. Then there are special resolutions where the number of votes for a resolution to pass should be more than three times the number of votes against. A decade ago, regulations introduced a new category of resolutions referred to as “majority of minority” resolutions. Such resolutions require more than 50 per cent of the “minority” votes in favour; the “promoter” or the related party does not have a vote.

  Reviewing the shareholder and voting outcome data for the Nifty 500 shows an interesting pattern. Despite the checks and balances that the regulators have placed, 64.4 per cent of the votes are in favour of a resolution, 1.2 per cent are against, with 34.4 per cent abstaining. Ignoring the abstention, support for resolutions jumps up to 98.15 per cent, with just 1.85 per cent dissent votes. This vote translates into 99.5 per cent of the resolutions being approved. Despite this there are numerous instances of resolutions with 100 per cent of institutional investors being “dissent”, or even 40 per cent of all investors being “dissent”, but the promoters, with their majority ownership and vote, pull these across the finish line. How can you explain this?

The current application of majority-of-minority voting, where promoters or interested parties are excluded from voting, is limited to a few specific circumstances. Expanding this requirement to cover all resolutions, however, would undermine the foundational principle of shareholder democracy, as it risks disenfranchising the majority by allowing a minority group to set the agenda. 

  As an alternative, the Securities and Exchange Board of India (Sebi) could start a practice inspired by a constitutional precept — after due modification. Just as the President of India may return a Bill to Parliament for reconsideration, a structured shareholder dissent review mechanism should be introduced. Under this framework, if a resolution receives significant opposition — defined, for instance, as more than 10 per cent of the votes cast against — the board would be obliged to formally engage with the minority shareholders and understand their concerns. Thereafter, within a specified timeframe (eg four months), the board would be required to disclose the steps taken to address these concerns, which could include, where necessary, amendments to the original resolution.

  Importantly, as with the constitutional provision, the board may ultimately choose to go with its original decision. On the other side, if the investors are not persuaded by the company’s thinking and continue to feel strongly, they are free to sell the stock.

A dialogue on resolutions with more than 10 per cent dissent votes means that less than one in 10 resolutions will need to be revisited — not a large number, yet meaningful to foster a culture of consultation. Mandating boards to respond meaningfully to substantial dissent by introducing a shareholder dissent review mechanism, regulators will promote constructive dialogue between companies and investors, thereby strengthening the practice of shareholder democracy.

The author is with Institutional Investor Advisory Services India, a Sebi-registered proxy advisory firm. The views here are personal. X:@AmitTandon_IN