MUTUAL FUNDS BECOMING "ACTIVE" SHAREHOLDERS?

By Ruma Dubey

We had seen, a few years ago, how institutions for the first time had spoken out in the open about why it questions Maruti Suzuki’s decision to put up a plant in Gujarat, which in turn it will sell to Maruti. Suzuki was to earn 17% ROCE on the Gujarat plant and this plant would have zero cash flow. The management probably never even in its wildest of dreams could have imagined that it would face the kind of opposition that it did and it was after 20 months of negotiations with shareholders that it go the approval to go ahead.

We have seen similar kind of activism, almost always from minority shareholders –they rejected 9 out of the 12 resolutions. They rejected the approval to a loan agreement between the company and United Breweries, rejected pacts between the two to sell certain immovable properties. They also did not give approval to a services agreement between USL and Kingfisher Finvest India, rejected a sponsorship  pact between USL and United Racing & Bloodstock Breeders and also disapproved a sponsorship pact between USL and United Mohun Bagan Football Team Pvt Ltd.

There have been other instances too - shareholders had rejected the proposed move by Ambuja Cements to buy majority stake in ACC through a complex deal. Prior to that, Tata Motor’s shareholders stalled compensation proposals of top executives. And there was the case of Cadbury India too, where Bombay high court directed the company to pay Rs.2,014.50 per share to buy back its stock, 50% more than its original offer of Rs.1,340 made in 2009.

Akzo Nobel, Alstom, Crompton Greaves, PTL Enterprises, Siemens, Coal India - there have been some instances of shareholders demanding answers and rejecting proposals which diluted the value for minority shareholders. White this small band of retail investors have been very active and vocal, what about mutual funds and institutions? They are the ones with deep pockets and hold considerable of power in their investing companies. But why is it that when it comes to activism, they stay quiet? Their collective power is so much stronger but they prefer to negotiate or weed out the thorns only through private discussions.

We are currently something known as “mutual fund activism” in USA. And Ultratech is facing the ire - Benjamin Nahum, a portfolio manager at Neuberger Berman, the mutual fund company and the largest investor in the company. And here, the activism is not against a single issue but over how to increase the value of the company. In Ultratech, in August 2015, Nahum sent a private letter to CEO Arthur Zafiropoulo and his management team, voicing concern over the company's stock performance and its executive compensation plan. In April’16, Neuberger told the company that it was nominating two board candidates. Shareholders voted Neuberger's nominees onto the board at the July annual meeting.

Another very ‘active’ fund manager is T. Rowe Price and he is currently, publicly, pushing Oracle Corp to improve its $9.3 billion offer for cloud storage company NetSuite Inc.  The fund wrote out a letter to Oracle saying that it will not tender its shares.

In September this year, Franklin also went public about its discussions with chemicals firm, Axiall Corp. It told the company to review its strategic options for growth, culminating into the company selling out for $2.3 billion to its competitior, Westlake Chemical.

See, these are not corporate governance issues but funds which have invested heavily in companies are actively telling companies, that too out in the public, about how to run their companies or redirecting them to make the right decisions, right from strategy shifts, leadership changes to marketing; all which will add more shareholder value.

Earlier, this was done in private but now Funds feel that putting it in the public forum, keeps the minority shareholders aware, helps garner their support too and put pressure on the CEO to react.

If this were to be done in India, surely Infosys would have seen the biggest number of “active” funds. PSUs simply do not give this bandwidth thus no activism would work. But this band of activism is welcome and is should be in the public forum as it gives us shareholders also an opportunity to participate in decision making.

The institutional investors and mutual funds might already be dictating terms to the promoters within the confines of their conference rooms but taking it public does ensure a closure and give the retail investor to understand the workings on the company well. Yes, it could backfire when unreasonable terms are dictated but that again, when in public forum could be thwarted.

This is positive activism and we wish mutual funds and institutions open up here in India too; it could probably usher in a new era of leaders and transparency.