Editorial 1 : At arm’s length, for corporate health
Introduction: A recent article on Jamie Dimon, the CEO of JP Morgan Chase, flagging concerns over the “undue influence of proxy advisors” gave the impression that PAs are all powerful. While that may be true in other countries, it does not seem to be the case in India.
Who is Proxy Adviser?
- In the context of corporate governance, a proxy advisor is an independent research firm that analyses companies and issues recommendations to investors on how to vote on shareholder proposals at company meetings.
Proxy Advisors: Influence and Controversies
- Proxy advisors attract attention when:
- Their recommendations lead to rejection of resolutions (e.g., Nestle’s royalty payout).
- There is a divergence of views (e.g., ITC Hotels demerger).
- It is rare for proxy advisors (PAs) to be unanimous and face investor approval with few protests, as seen in:
- ICICI Securities delisting.
- Tata Motors DVR proposal.
- Indian Context:
- Stakeholders Empowerment Services (SES) recommended “against” 1,841 resolutions in 2023-24; only 55 were rejected.
- Indian institutional investors conduct their own analyses, using PAs for support.
- Role and Perception of PAs:
- PAs serve as a support system for informed decision-making.
- They often criticize and highlight faults, which can be compared to a doctor diagnosing issues for corrective action.
- Challenges with PA Interpretations:
- Differences in legal interpretations between PAs and companies.
- PAs create benchmarks, viewing governance as a higher form of compliance.
- Limitations and Expectations of PAs:
- PAs should not second-guess management decisions if fair and within governance parameters.
- They lack the board’s expertise, vision, and information.
- Board notices should provide detailed rationale and disclosures to avoid negative recommendations.
- Controversies in Valuation:
- PAs are not valuation experts but have a duty to flag unfair valuations.
- SES relies on independent valuations, considering market price as a fair estimate in listed entity deals.
- Company Issues with PAs:
- Notable cases: Tata Motors and ICICI Securities.
- In both cases, few investors raised issues despite majority institutional support.
- ICICI Securities Case:
- In the case of ICICI Securities, the argument was that the valuation was based on the current price which was lower than the listing price and why the National Company Law Tribunal scheme route was adopted, although the market Regulator SEBI had permitted this.
- The NCLT scheme route was chosen in a transparent manner, but questions were raised.
- The ICICI proposal satisfied all PAs and most institutional investors.
- In fact, the management chose the NCLT scheme route, which is a two-step process involving greater scrutiny, first from shareholders and then from the NCLT.
- There is no law which says that if someone’s expectations are not met, the proposal is unfair.
- Even PAs, after giving their opinion, cannot say that if their recommendations are not followed, they will cry foul.
- Law and logic both cannot support unreasonable arguments and expectations.
- Any legally available route, as long as it does not intend to benefit any select individual, can be chosen.
- In the case of ICICI, no individual has unfairly benefitted.
- Tata Motors Case:
- The case of Tata Motors was unique, where an individual approached all and sundry to convince them that Tata Motors DVR’s shareholders were treated unfairly.
- The exchange ratio should have been one equity share for one DVR share, notwithstanding the market price difference, which has been prevailing for a decade.
- A new concept of economic valuation was invented to claim Tata Sons was increasing their value at the cost of other shareholders.
- Although, factually, Tata Sons’ equity was coming down.
- The law cannot control a flight of imagination; it also cannot take the same flight.
- It has to remain grounded. So is the case with companies and investors. PAs are no exception.
Conclusion: In its existence, which spans more than a decade, the PA industry, after struggling in the initial few years, has come of age. The challenge now is not to boast about its success but rather maintain its independence, be free from conflict and continue without worrying about the outcomes. After all, proxy advisors are not beneficiaries of the outcome.
Editorial 2 : Rules of the game
Introduction: At the end of an election, the focus is on reading the mandate and analysing the performance of the major political players. Elections, however, are not just about victory and defeat. They are equally, if not more importantly, tests of the process, and its checks and balances, the system’s ability to ensure fair play.
Herculean Task of Election Commission amid highest expectation
- For India’s poll monitor, the Election Commission (EC), that task is both delicate and difficult: Making adherence to due procedures non-negotiable in a diverse and intensely competitive field, where passions often run high.
- On Tuesday, when it declared the results of the General Elections, held over a gruelling six weeks amid heat wave conditions in several parts of the country, the EC could justifiably claim to have lived up to its own high standards.
- “Parinaam mein hi pramaan hai (the result is the proof)”, said the CEC.
Blemishes on Freeness and Fairness of 18th General Election
- Ahead of this election, and also during it, concerns about its free-ness and fair-ness, taken for granted so far, were raised by political players, and they found an echo among sections of voters.
- The backdrop to the 18th Lok Sabha elections featured an executive which showed little compunction in weaponising central investigative agencies against political opponents.
- In January, Jharkhand Chief Minister Hemant Soren was arrested by the Enforcement Directorate (ED) on corruption charges.
- About two months later, his Delhi counterpart, Arvind Kejriwal, was taken into ED custody — it required a Supreme Court verdict to let the AAP supremo campaign.
- This created fears about the playing field being rigged.
- A big question long before the winners and losers were decided was, therefore, about the integrity of the process itself.
How did EC manage to play a positive role amid criticism?
- In the charged setting, the EC stepped up to its role, even as it invited criticism and controversy.
- Among other steps, it issued notices to the presidents of the BJP and Congress on alleged breaches of the model code of conduct by their star campaigners, including Prime Minister Narendra Modi and Congress leader Rahul Gandhi.
- Polling in parts of West Bengal was marred by violence, but the law enforcement agencies ensured that disturbances were contained before they took a serious turn.
Final proof of EC’s credibility in election
- No losing candidate — not Uddhav Shiv Sena’s Amol Gajanan Kirtikar who lost to Shiv Sena-Shinde’s Ravindra D Waikar in Mumbai North West by a mere 48 votes, nor CPM candidate V Joy defeated by Congress’s Adoor Prakash in Attingal, Kerala, by less than 700 votes — is reported to have questioned the fairness of the result.
- It’s yet another testament to the resilience and credibility of the country’s election process and machinery.
Conclusion: Being a noisy democracy, it is expected from people to get some criticism regarding impartiality of an institution. It depends of foundational strength of that institution to shrug off those criticism and fulfil its duties. Election commission has shown the world that not only elections in India are most democratic, they are most cherished public good from India to the world.