Corporate goverance: Get up, stand up

Carl Icahn, Daniel Loeb and Stephen Mayne are just three of the more famous shareholder activists in the West. Icahn, himself a financier and a private equity investor (and one of the world’s richest persons, to boot), has been keeping himself busy over the years, bringing ostensibly wayward managements back on track. Two years ago he bought a stake in Time Warner worth billions, and attempted to dictate the entertainment giant’s strategic direction. He succeeded partly when Time Warner sold a part of its stake in its AOL division.

Back home, such successes are virtually invisible, and so are shareholder activists. But thanks to the burgeoning tribe of foreign institutional investors (FIIs), who own, on an average, 23 per cent in BSE Sensex companies, Indian promoters and managements have to think thrice before making a move. Last fortnight, the promoters of Satyam Computer got the shock of their lives when they adventurously attempted to allow the IT services major to acquire a real estate and a construction company owned by the promoter family.

The folly of the Satyam management has been well documented, but the good news from the shareholder’s point of view is that this wasn’t an isolated case of activism. In September, the Anil Agarwal promoted Vedanta Resources had to withdraw its restructuring plans when one of its institutional investors, a UK-based hedge fund, Children’s Investment Fund, threatened legal action. A month earlier, Reliance Mutual Fund had raised issues relating to intercorporate deposits by Novartis (India) with its group companies. In the same month, Macmillan India faced criticism from retail investors for its decision to transfer the publishing entity to an unlisted company.

Shareholder activists are feared by promoters and managements simply because they have the ability to batter a stock to pulp. This fear, in turn, more often than not, ensures that they don’t make shareholder-unfriendly decisions. After all, more than any legal remedy (Indian laws don’t equip minority shareholders with ammunition to be activists), the best way for a shareholder to take action against seemingly ill-advised strategy is to hammer the share.

That was the reason for Satyam Computer reversing its decision to acquire the unrelated businesses overnight— the American Depository Receipts (ADRs) of the company (listed on the NYSE) fell almost 60 per cent in a single trading session.

In the domestic market, the scrip fell 31 per cent, even after the company cancelled its proposal. Almost every broking firm tracking Satyam put a sell on the stock. Similarly, the restructuring of Vedanta Group, which comprised listed firms like Sterlite Industries, Madras Aluminium in India and Vedanta Resources in the UK, was not taken well by the investors and analysts, who recommended sell on the firm’s shares (see Investors Show No Mercy). Sometimes, the stockmarket does know best.

—Rachna Monga & Virendra Verma