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Role of Institutional Investors and Proxy Advisory Firms

Bangalore, August 22, 2013

Shriram SubramanianINGOVERN RESEARCH SERVICES PVT. LTD.

PRESENTED TO INDIAN ASSOCIATION OF INVESTMENT PROFESSIONALS

Indian Markets Overview

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Exchanges No. Listed Actively Traded

Indices Mkt. Cap

National Stock Exchange

~1,400 companies

~900 •Nifty 50•Junior Nifty 50•S&P CNX 500

~USD 1.0 trillion

Bombay Stock Exchange

~5,000 companies

~1,000 •Sensex 30•BSE 500

~USD 1.0 trillion

Type Number Investments*

Foreign InstitutionalInvestors (FIIs)

1,740 $ 119 billion

Mutual Fund Families

44 $ 139 billionPromoters

52%

FIIs24%

Mutual Funds/

Insurance11%

Retail8%

Others5%

Ownership Structure

* includes Fixed Income

Institutional Shareholders – Perception or Reality?

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Voting Patterns of Mutual Funds in India

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Indian mutual funds are still largely passive and/or indifferent while

voting at investee company shareholder meetings

Routine CG matters still ignored by Investors;

Funds abstained from voting for 51.5% of the resolutions in 2012-13

Only 431 out of 28,290 resolutions (~1.5% of total resolutions) disclosed by mutual funds have been voted AGAINST in 2012-13

Two mutual funds completely abstained from any voting in 2012-13 and are not compliant with SEBI disclosure norms, while some funds have

disclosed voting data incorrectly

Source: Mutual Fund Voting Patterns 2013 Report published by InGovern Research Services in August 2013

Voting Infrastructural Hassles

eVoting is mandatory* for postal ballots

– Not much change in votes cast by MFs on postal ballots

Show of Hands

– Franklin Templeton reports voting Against appointment of director at Idea; yet Idea discloses that the director was appointed unanimously

– Who is reporting wrongly?

Institutional investors should canvass/demand eVoting for all shareholder meetings

– With regulators

– With companies

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* For 500 companies, but most companies have adopted it

Key Issues with Role of Institutional Investors

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Disclosure of Governance/Voting Policies and Voting Records

Disclosure of material Conflicts of Interests which may affect exercise of ownership rights

Institutional investors are becoming Short-Term Investors

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Mutual funds to report how they vote from FY2010-11

Need to show activism to appeal to newer long-termfund sources: foreign investors, EPFO, insurancecompanies.

Domestic Mutual Funds

ADR/GDR holders given right to vote

Need say in corporate governance issues in India

Voting Disclosure by companies immediately aftermeetings – promoter, institutional, non-institutional

Companies Bill 2012 (passed by Parliament) explicitlyprovides for e-voting for shareholder resolutions

Public holding in listed companies > 25%

Foreign Institutional Investors (FIIs)

Other Developments

Developments Enabling Institutional Activism

Hindering Activism

Hostile Takeovers

Benign Lenders

Legal Hassles

Regulatory Enforcement

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Role of Proxy Advisory Firms

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Independent Directors

Minority Shareholders

RegulatorsInstitutional Investors

Proxy Advisory

Firms

InGovern – India’s 1st Proxy Advisor

Corporate Governance Research

“Governance Radar” Proprietary Framework

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Vote Recommendations

AGMs, EGMs, Postal Ballots, Court-convened meetings

Risk Monitoring Service

Financial, accounting and legal issues with companies

Proxy Voting Service

Execution of votes at shareholder meetings

Pioneer Proxy Advisory company in India since 2010

Assists institutional investors that have financial or reputational exposure to public cos.

Criteria in “Governance Radar”

•Appointments, Compensation, Meetings, Remuneration, Responsibilities, Chairperson, Code of Conduct, Company Secretary, Independent Directors etc.

Board

•Audit, Nomination, Shareholders, Risk, Remuneration Committee Composition, Meetings, Powers, Responsibilities

Board Committees

•Code of Conduct, Remuneration Policies, Risk Management, Whistleblower Policies

Management & Operations

•Audit & Accounts, Auditor Independence, Ethical Standards for AuditAudit & Accounts

•Related Party Transactions, Shareholders Meetings & Voting, Other RightsShareholders

Rights

•Audit & Accounts, Board Appointments, Composition, Remuneration, Meetings), Board Committees, Independent Directors, Management & Operations, Ownership, Shareholder Meetings, Whistle Blower Policies

Disclosures

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Approximately 400 criteria evolved

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Case Studies

Board and Governance Structure in India

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10% of companies have board sizes of either more than 16 directors or less than 7 directors

9% of companies were non compliant with Clause 49; with <50% IDs and no Independent Chairman

One in Five Directors attend less than 75% of Board Meetings

9% of Independent Directors have outside directorships in more than 10 public companies

22% of IDs have served on the Board for more than 9 years

Only 45 companies had Audit Committees comprising only of IDs

13 companies have not constituted a Remuneration Committee

53 companies have had the same Auditors for >5 years

Source: India Proxy Season 2012 Analysis Report published by InGovern Research Services in November 2012

Cases

Colgate, Wyeth, P&G

– Mr. R. A. Shah is ID and Chairman of Audit Committee

– Similar cases with many MNCs

Ingersoll Rand has only 3 Directors

Related Party

– Madras Cements contributes to Engineering College

– KSB Pumps – sole selling agent at 12% commission

Compensation

– HCC almost doubled CMDs compensation when in CDR!!

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Case Study: Akzo Nobel India Limited

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• CCM – Amalgamation of 3 unlisted promoter heldentities with the listed entity

• Issue – Unfair valuation of promoter held unlistedentities resulting in minority shareholder dilution

• Votes AGAINST - 23.11%; Resolution wouldn’t havepassed if 2 key institutional investors had notabstained

InGovern recommended voting AGAINST the amalgamation

Case Study: Escorts Limited

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• CCM – 100% subsidiary sold to a trust controlled by promoters

• Issue – Complicated cross holdings between these group entities; Merger resulting in issue of treasury shares; Unfair scheme with increase in promoter stake by ~10%

InGovern recommended voting AGAINST the restructuring

Case Study: Pantaloon Retail (India) Limited

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• CCM - Transfer of Fashion division and restructuring

• Issue – Dilution of direct voting rights of public shareholders ofPRIL and FVIL in FLFL; Same share exchange consideration forboth Equity and DVR Shareholders; Disclosures and transparencyissues

• Promoter DVR holding increased from 46.57% to 51.45% aftervoting rights on DVRs increased from 1/10th to 3/4th

• Promoters hold 51.45% in DVRs and only 43.66% in Equity Shares –Same swap ratio used

Investor group hits out at Pantaloon Retail’s demerger overdilution of voting rights

InGovern recommended voting AGAINST the restructuring

Proxy advisory firm opposes Pantaloon Retail restructuring

Vote against Pantaloon’s fashion biz demerger: InGovern

Case Study: Ambuja Cements Limited

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• Amalgamate Holcim India with Ambuja Cements with Ambuja ending up owning ACC

• Economic interest in ACC given up without giving upControl. Cash outflow of Rs. 3,500 crores amounting to aselective buyback.

• Votes – Resolution yet to be put to vote for shareholderapproval. SEBI reviewing the Scheme post opposition of thescheme by InGovern

Sebi looking at minority interest in Holcim-Ambuja Cementsdeal

Could be a landmark – Holcim doesn’t get Voting and Majority of Minority need to Vote FOR

Analysts see raw deal for Ambuja Cements’ small investors

Rude shock for Ambuja minority shareholders

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Questions?

Thank YouShriram Subramanian

InGovern Research Services Pvt. Ltd.

shriram@ingovern.com