Institutional Investors Reject Tata Motors Pay Resolutions: Is Tide Changing in India?
Institutional shareholders have voted down proposals to approve director remuneration of Tata Motors, one of the largest automobile manufacturers in India and part of one of the largest conglomerates in the country, Tata Group. The outcome came as a surprise in India given that 463 of Bombay Stock Exchange 500 companies have a “promoter” who sometimes controls the affairs of the company (be that government, family groups, or multinational corporations). However, with the recent changes to corporate governance rules in India and the new Companies Act, 2013 that have empowered minority shareholders, we’re seeing an unprecedented wave of shareholder activism in corporate India.
In March, Maruti Suzuki faced backlash from minority shareholders after the automaker announced an unfair supply agreement with its Japanese parent. I was in India a couple of weeks ago when the Tata Motors news was creating a lot of buzz in the media as well as in the industry. I thought it might be interesting to share this news with a wider audience and to get your thoughts.
For starters, Tata Motors recently reported a standalone loss as it continues to grapple with a prolonged slowdown of the auto industry. Against this backdrop, shareholders on 27 May received a notice to obtain their approval through special resolutions related to director compensation (requiring 75% majority):
- A $140,000 annual salary each for two directors (Ravindra Pisharody, executive director of commercial vehicles, and Satish Borwankar, executive director of quality) in case of no profits or inadequacy of profits in any financial year for the next three years (FY15, FY16, and FY17) and incentive remuneration, benefits, perquisites, and allowances as determined by the board from time to time.
- Approval for ratification of excess remuneration paid for the financial year ended 31 March 2014 for the above mentioned directors of $535,000 and $408,000, respectively, and $2.5 million for the (late) Karl Slym/legal heir, a managing director who died in January.
Reason for Special Resolution Approval by Shareowners
There are two reasons why a special resolution was needed to approve the above resolutions, per the new Companies Act, 2013:
- Tata Motors needed shareowners’ approval by way of special resolution to pay such remuneration to two of its directors up to the ceiling limits (11% of net profits) for the next three years, and to comply with disclosures requirements.
- To waive recovery of the excess remuneration paid to three directors in FY14 because it was a year of no profits, Tata Motors needed to ratify the payment by shareholder approval by special resolution, which is subject to the approval of the central government.
Shareowner Voting Results
Based on the voting results released by Tata Motors, although the promoters supported the resolutions, approximately 65% of the institutional investors voted against all three resolutions. Approximately 41% of the retail public investors voted against the resolutions. In total, Tata Motors fell short of the required majority of 75% by a margin of 5% for each of the three resolutions.
While the company is recovering from the shock that it lost the required supermajority (75%) by such a small margin, corporate governance experts hailed the rejection of the three resolutions. It is a clear indication that Indian investors are voicing their opinions in response to the Companies Act, 2013 and to listing rule amendments empowering minority shareholders.
The company justified its resolutions for minimum remuneration as well as excess payments by saying it was comparable to the industry. It blamed losses on the economic slowdown, weak consumer sentiments, subdued infrastructure activity, a tight finance environment with high interest rates, and weak operating economics with fuel price increases.
Institutional Investor Advisory Services (IiAS), a proxy advisory firm in India, advised its clients to vote for the resolutions. According to IiAS, the excess remuneration was insignificant considering the size and complexity of Tata Motors’ operations. The company had shown healthy shareholder returns for the past three years and had distributed over 80% of its net profit as dividends to shareowners. The share price had appreciated by 130% over the last three years. Hence, in order to retain and attract talent to the management team, IiAS and its institutional clients supported the resolutions.
However, few other institutional investors thought the variable pay elements (incentive, benefits, perquisites) were not capped, making it difficult to determine minimum remuneration, so they voted against the resolutions.
The challenge remains as to how Tata Motors will recover the money, especially from one of the directors, Karl Slym, who died earlier this year. Amidst all this drama, Tata Motors’ 69th Annual General Meeting will be held on 31 July. Is there scope for another round of approval because of its marginal loss?
Minority Shareholders Have a Powerful Voice
CFA Institute believes that minority shareholders have to exercise their rights and make their voices heard. In an effort to educate, empower, and engage investors, CFA Institute in collaboration with the Indian Association of Investment Professionals has released the Investor’s Guide to Shareholder Meetings in India, which identifies the rights, roles, and responsibilities of investors.
Each company, and each of its resolutions, is unique and must be analysed based on the merits of the individual case. We identify common resolutions in the guide and offer guidelines to shareholders on what to consider before voting for or against a resolution. Take a look at pages 29 to 31 for our guidelines on approving directors’ remuneration. And tell us what you think!
If you liked this post, consider subscribing to Market Integrity Insights.
Photo credit: ©iStockphoto.com/artist-unlimited