Thursday, October 25, 2012

Paper on Shareholder Activism

Two years ago, any talk of shareholder activism in India would be brushed aside or even ridiculed. But, since then, things seem to have changed rapidly. The last couple of years have witnessed shareholders in Indian companies becoming more active and assertive. This space has also seen the proliferation of proxy advisory firms and other corporate governance intermediaries that have aided such activism.

All of these generated some curiosity in my mind, and I attempted to look into these developments with two objectives:

(i) to track the developments and trends that are emanating in India with respect to shareholder activism; and

(ii) to set out some basic observations on whether at all these activist measures are likely to have an impact on corporate governance in India.

The findings thus far are contained in a working paper titled “The Advent of Shareholder Activism in India” that I have posted on SSRN. The abstract is as follows:

The recent spate of crises afflicting the corporate and financial sectors around the world has triggered a new wave of corporate governance reforms, which call for greater empowerment of institutional and retail shareholders. The need for such reforms cannot be greater than in India where controlling shareholders, or promoters, dominate the corporate landscape.

Consistent with reforms in several countries that seek to confer greater power in the hands of shareholders, the recent regulatory developments in India signify a greater opportunity for shareholder participation in the form of postal ballot, e-voting and the like. The rapid proliferation of proxy advisory firms, a hitherto non-existent phenomenon in India, bestows shareholders with the advice necessary to exercise their corporate franchise in an informed manner. The presence of activist institutional shareholders such as private equity funds and hedge funds has already caused an upheaval in some corporate boardrooms in India.

While these developments pave the way for a transformation in the tenor of the governance debate, shareholder activism encounters certain structural and institutional weaknesses embedded in the Indian markets. The dominance of controlling shareholders in most Indian companies operates to dampen the effects of shareholder activism. The legal system and institutions in India are not conducive to rendering timely and cost-effective remedies to shareholders who adopt a litigation strategy to counter managements that are perceived to act inimical to shareholder interests. This paper finds that although shareholder activism is becoming palpable in the Indian markets, its impact as a measure of corporate governance enhancement is far from clear.

Readers’ comments and critiques are welcome.

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