The Hindu Business Line : It’s time retail shareholders had their say

It is remarkable how little influence retail investors have over the way their savings are used and companies function. Companies should encourage shareholders to form associations to draw managements’ attention to relevant issues or enable them to vote for a director to represent their interests.

M. Y. Khan

The securities market plays an important role in monitoring and disciplining companies and other intermediaries. It provides an objective valuation of equity issuers and protects shareholders against the abuses of management. Today, an active liquid market is a prerequisite for efficient monitoring, and market manipulation and insider dealings are severely punished. Securities regulations in areas such as disclosure requirements, accounting standards and audit procedures a re robust and comprehensive enough to check undesirable practices in operations within the corporate world.

The Takeover Code, with strong protection of minority shareholders as its aim, is one of the most elaborate pieces of regulation that functions as both a guideline and a cautionary set of rules for managements. Due diligence, restrictive cap on promoters and entry norms to provide quality to IPO issues have increased the safety for small investors. As such, the Indian securities market is at present one of the best crafted and protected markets in the world. Furthermore, legislation discourages holdings of large stakes by institutional investors and others so that wider ownership of companies can be promoted.

However, individual shareholders are still the weak partners in the crowd of investors. Though they contribute to the equity capital of companies directly or through financial institutions, it is remarkable how little influence and power they have in the way their savings are used and companies function. Retail investors are almost completely deprived of information on the actual functioning of companies.

Since retail (individual) shareholders are original founders of the capitalist system, the government having made wider share ownership possible through several policies, there should have been some system for appointing one representative of retail investors on the governing board of listed companies.

Institutional shareholders are increasingly able to exercise power, at least to some degree, so the question can be asked why retail shareholders so seldom try to have their say, and why they find it difficult to do so.

Why is it that they are, in practice, treated as providers of capital with no real effective rights. Retail investors are generally more loyal than institutions (they hold shares, on average, for longer periods), and their objectives and views, therefore, deserve consideration. In practice, though, they seldom get an opportunity to consult with or offer suggestions to company managements.

Any interaction is limited, and virtually confined to asking questions in a limited way and voting at the company AGM. Anyone who has attended AGMs knows that the views of individual shareholders are seldom taken seriously and their votes have virtually no effect. Their questions are generally treated neither with respect nor urgency.

It is hard to escape the conclusion that most chairmen and CEOs regard AGMs as a tiresome formality they are obliged to go through once a year, where their main priorities are to get their resolutions passed without hurdles and as quickly as possible.

The promoters and the management try to observe happy public relations at AGMs and deal expeditiously with any protests, if any. In fact, AGMs are hardly transparent exercises, and managements reveal only what they want to. Many a time, retail shareholders attending AGMs go back with little additional information on the company’s performance.

Retail shareholders are thus generally disenfranchised. Why is this? Real power is different from formal power, especially where customs and practices have permitted the latter to erode over a long period of time, and attempts to reconvert it into real power, promoting institutional shareholders such as mutual funds, have not proved retail-investor-friendly.

Collective power

Institutional shareholdings are considered more effective in terms of intervention at Board Meetings and at AGMs because big institutions have resources and can work with single-minded determination and perseverance. Retail shareholders, not being organised, lack all the three and the painful truth is that those who hold real power (in this case, managements) virtually never cede it voluntarily, even in part. When they appear to do so, it usually cloaks an attempt to consolidate it further down the line (the same is, of course, true of political power).

Even the public representative director does not possess the real power and resources to protect retail investors. It is thus clear that retail investors, as a combined voice, can certainly impact the decisions of company managements and that when they form associations or groups to raise issues effectively, there is bound to be a drastic change in the attitude of management.

The lesson is that the exercise of influence requires the ability to wield power and this can only be done if that power is concentrated and mobilised.

Formal investor associations in some countries have been able to shake up under-performing companies, sometimes changing the management and in some cases acquiring a controlling interest themselves. However, in India such groups have been rarely constituted and this concept has not gained currency.

Empowering shareholders

If individual shareholders believe their interests are not identical to those of institutions, one would expect they would organise themselves to mobilise their underutilised power and thus get the management’s attention.

After all, a quarter of the retail shareholders’ votes, if mobilised as a block, would represent no less than 8-10 per cent of the equity of an average company.

This strength is quite enough to be listened to seriously, especially if it were allied with the votes of one or more institutions.

For companies where the average holding by individuals amounts to over 30 per cent, the opportunity is even greater. For some reason, perhaps excessive individualism, this has not happened.

In the absence of any move towards forming a shareholders association in a company with an activist agenda, one way of enfranchising individual shareholders more effectively would be for them to have the opportunity to vote separately for the selection of a non-executive director to represent their interests.

This would imply that retail investors should have the right to elect a non-executive director on the board to represent their interest.

At present, the public representative director is nominated by the board that is dominated and controlled by the promoters. It would help if the law is changed in a way that would facilitate genuine election of retail shareholder representatives who have indicated in advance an agenda specifying what they would try to do, if elected.

Taking notice

Such an agenda put forward by retail investors would receive the right kind of attention. It could function as a kind of mandate which the board cannot wholly ignore and the issues raised by the retail investors will be examined.

At present, of course, this is not happening because of the window-dressing of appointing a public representative director just to satisfy the regulator.

Most of these directors do lip-service and earn high sitting fees. Even if they participate actively, they can be easily removed from the board. In such a situation, a retail investors’ association can nominate its own director who can discharge his obligations fearlessly.

While the corporate governance standards introduced by SEBI have put lot of pressure on companies to look into the grievances of small investors, the results have not been very positive because of the negligent attitude of most companies.

It will be worthwhile for SEBI to promote associations of investors at the company level or make it mandatory for companies to promote retail investors’ associations so that a large number of small investors can come together in their own interests as well as those of the company.

(The author is Chairman, Inter-Connected Stock Exchange.)

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