Last-minute exits of Jalan, Mehta from HDFC show global proxy firms' clout

Bimal Jalan, former RBI governor
Two independent directors of Housing Development Finance Corporation (HDFC) Bimal Jalan and Bansi Mehta, who had offered themselves for reappointment, pulled out just hours before the company’s annual general meeting (AGM) last week. Since the resolution was not put in motion at the AGM, the results of the e-voting, which would have happened earlier, were not disclosed. 

Even chairman Deepak Parekh, whose continuation of directorship was on the agenda, just about scraped through with 77.36 per cent of the votes, a little more than the 75 per cent required. 

This, experts say, points to the rising clout of foreign proxy advisory firms, which give recommendations on how to vote at shareholders’ meetings to their clients – global institutional investors. 

Two foreign proxy advisory firms ISS and Glass Lewis advised shareholders to vote against the reappointment of Deepak Parekh (after he attains 75 on October 18, 2019), Bimal Jalan and Bansi Mehta. 

Interestingly, domestic proxy advisory firm such as Stakeholders Empowerment Services (SES), also advised to vote against independent directors Jalan, Mehta, as well as JJ Irani. Investors did not heed the SES recommendation on Irani, who was reappointed with 94.58 per cent of the votes. 

While domestic proxy advisory firms are regulated by market regulator Securities and Exchange Board of India (Sebi), foreign proxy advisors recommending voting positions on Indian companies are not regulated. Experts are now saying there is a need to regulate them and also educate the foreign proxy advisors about the nuances of India, where the businesses are still being driven by goodwill of people in the boards. 

Kotak Mahindra Bank MD and CEO Uday Kotak, who was also the chairman of the Sebi appointed committee on corporate governance in 2017 said at the sidelines of HDFC Asset Management Company’s listing ceremony, “We have seen the concentration of voting through global proxy advisory services. This has led to concentration of voting power in the hands of a few global agencies and question the very basis of well-run, widely-held companies and diversified ownership.” 

“The time has come for us to ask this question that while proxy advisory services in India are regulated in India, what about regulations about global proxy advisory services, especially for India-listed and regulated companies,” he added.

JN Gupta, MD of domestic proxy advisory firm Stakeholders Empowerment Services (SES) agreed, “There has to be a level-playing field for all participants. If we are regulated, there is no reason why proxy firms operating outside India but covering Indian companies should not be regulated,” said. 

Sebi could mandate these firms to be registered in India. “Once you are registered, you are answerable to Sebi,” he said. If a firm issued factually incorrect reports because of which a company suffers, the regulator could then pull up the proxy advisory firm, added Gupta. 

The stance taken against Deepak Parekh has disturbed many Indian promoters and corporate executives, who until now have only been too eager to court foreign investors. 

Local executives say foreign proxy advisors are oblivious to the market dynamics that are unique to India and the sentiments linked to individuals. 

“Parekh has been with HDFC since 1978 and the company has flourished under his leadership. I don’t see any reason why he should be removed,” said the CFO of a large Indian group. 

Another senior banker said the proxy advisory firm, by way of mathematical models, cannot replace a senior executive without proposing a credible alternative. 

B S Mehta
“In India, there is a serious lack of credible individuals who can sit on the board and steer a company. These advisory firms are inflexible and are out there to do a hatchet job without really suggesting any option to fall back on,” said a senior private sector banker. 

Even as the chances of such an incident repeating in any other Indian company is slim. Indian companies are mostly promoter owned, or have significant promoter holding, where proxy advisory firms cannot become active change agents like in the case of HDFC. 

AT HDFC, the US-based firms advised voting against former Reserve Bank of India (RBI) governor Jalan on the ground that he attended less than 75 per cent of board and committee meetings in the last fiscal year “without a satisfactory explanation”. 

“Bansidhar Sunderlal (Bansi) Mehta and Deepak Shantilal Parekh each serve on a total of more than six public company boards,” the advisory firm ISS told the voters. They do not like an independent director to be on boards of more than five companies. 

Against Mehta, the rule cited was more than 10 years of association with the company, and shares worth more than Rs 50 million. Against JJ Irani, the domestic proxy advisory firm cited association for more than 10 years, and shares worth more than Rs 50 million. 

Interestingly, all three independent directors had attained the age of 75 years, which, according to recent Kotak committee recommendations, should invite special resolution by shareholders for reappointment. 

At the board meeting before the AGM, Jalan and Mehta resigned from the board with “a view to further refresh the board of directors in a phased manner and prior personal commitments”. 

Sources said Jalan, whose tenure would have come to an end in 2019, did not want to continue to keep up with the spirit of the Kotak committee recommendations. Jalan doesn’t sit on any other board. 

Globally, exchange traded funds (ETFs) typically engage the help of proxy advisory firms. The ETFs under management are more than $5 trillion globally, and rely on proxy advisors for voting purpose. This is particularly tricky for India as the country itself is a fraction of the total assets of such ETFs, and a company such as HDFC is an even smaller proportion. 

Such investors, thus, are least bothered about the nuances of India and its companies. But for a company such as HDFC, where foreigners hold three-fourth of the total shares, proxy advisors can be the deciding factor.