Can shareholders benefit from high activism?

Jul 4, 2014

In this issue:
» How prepared is the cement industry for the revival?
» Breakthrough in centre state disagreement to pave way for GST rollout
» The economic scenario is improving
» Is the world setting the tone of another financial crisis?
» ...and more!

Amongst various stakeholders in a company, minority shareholders by virtue of their low bargaining power have always found themselves getting a raw deal. However, in a sweeping change, minority shareholders tasted success in restraining the largesse of Tata Motors.

In an unprecedented move, minority shareholders have turned down the company's proposal to hike salaries of top management. This development comes at a time when the company has been facing falling demand in the domestic markets. Therefore its standalone operations posted losses in two quarters in FY14. Consequently, the company's move to hike remuneration of top management in excess of 5% of the net profits did not go down well with shareholders. The said proposal was stalled as the company did not get the necessary approval of three fourths of minority shareholder's votes.

Tata Motors had earlier defended its salary hike in line with implementation of strategies for future growth. However, minority shareholder activism in this case arrested the company's irrational exuberance. Another company, Maruti Suzuki recently had to bow down to increased shareholder activism. But in this case, institutional investors were opposing, the proposed takeover of the Gujarat plant by parent Suzuki Motor Corp, under the guise of safeguarding minority shareholder's interests. Mounting pressures saw the company change the terms of its investment plans. As per the new plan, the plant would be transferred to Maruti Suzuki at book value in the event of termination of contract manufacturing agreement with the parent. Additionally, the company has also decided to seek minority shareholder's approval as a measure of corporate governance.

While such developments may be few and far in between, they certainly have set the ball rolling for greater participation by the investor community. Moreover, they are also likely to set higher standards of corporate governance and transparency in Corporate India.

In yet another positive development, stringent corporate governance norms for listed companies are likely to come into effect from 1st October 2014. The norms were laid down by Securities and Exchange Board of India (SEBI) to align the provisions of listing with the newly enacted Companies Act, 2013. Amongst various proposals, notable ones include enhanced disclosure of remuneration policies, mandatory constitution of mandatory and nomination committee and compulsory whistle blower policy. These norms will further strengthen corporate governance in the country and provide the investing community higher powers to act as a check on a company's affairs.

What are your thoughts on whether the growing shareholder activism will bring in greater accountability? Let us know in the Equitymaster Club or share your comments below.

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 Chart of the day
And while we are on the subject of Corporate India, let us see how prepared the cement sector is. Geographically, the cement industry is split into 5 regions. As can be seen in today's chart, Southern India has the highest installed capacity followed by the Northern region. However, Western and Central India are pretty much at par. The reason why South India has highest installed capacity is because the region is rich in limestone reserves.

With the new government assuming power, the construction activity is likely to gain momentum. And this may result in increasing capacity utilization. In fact, as per one study the utilization rate is expected to reach 85% in FY17. If it indeed happens, the cement industry might face capacity constraints and would struggle to meet demand. This may again trigger players to expand their capacities. However, this time around we believe that the industry players would be more circumspect and careful while expanding capacities. Last time around, when the industry faced shortages, players went in for blind expansion which led to significant overcapacity. This led to a huge fall in realization and profits. In fact, there was so much excess capacity that few firms indulged in cartelization to protect their profits. Thus, it would be interesting to see how the players position themselves this time around to capitalize on the infrastructure boom that the country is expected to witness.

Is cement industry geared up for the revival?

There is some good news regarding big policy measures in the days leading up to the budget. As per a report in the Business Standard, the long delayed Goods and Services tax (GST) may soon see the light of day. This important legislation has the potential to add 2 percentage points to India's GDP Growth. The UPA government's well documented disagreements with state governments delayed the bill by 4 years. Issues relating to petroleum and central sales tax (CST) were the bones of contention. However, the new government seems to be willing to work with state governments on this. The finance minister may present a broad outline of the rollout in the budget on July 10. This is indeed a big positive development. The GST will certainly simplify the indirect tax structure in the country. As long as the states get adequate compensation, we believe the government should fast track the rollout of GST. This will certainly give a boost to the economy.

It's been a month now since Modi took the reign of the Indian economy. The reformist Modi-led government is expected to uplift the sagging economy that has reported sub-5% GDP growth for last two years. If we were to go by few economic indicators for the month gone by, then most of them demonstrate a plausible economic recovery. One of these is the latest service sector data. Services activity jumped to a 17-month high in the month of June this year. A survey attributed this buoyancy to the robust order flow during the same period. Also, the HSBC PMI rose to staggering 54.4 points in June from 50.2 in May. Any number above 50-point mark is indicative of expansion from contraction. Riding the Modi wave, the services sector has bounced back. Pick-up in new business activities and strong positive business sentiments have supported the rise. But there is a flip side to the story. Bank credit is low. Visibility of turnaround in manufacturing or agricultural activities is still away. Deficit stands looming. Inflation remains sticky. Productive employment rate is still low.

The few positive indicators in the first month of new governance have definitely swept off the feet of few. But it is too early to be delighted we believe. We certainly await the budget announcements, its after-effects and the sector reforms that would actually turn expectations into reality.

The dash for trash. This is what a noted commentator Satyajit Das is calling the current trend in the global capital markets. Writing in a leading business daily, Das is of the view that monetary authorities across most of the world seem to be behaving like politicians. In other words, they are suffering from short term memory loss. What else could explain the fact that the same policies that led to the crisis of 2008 are being pursued with full gusto even now. And what this is doing is once again giving rise to movement into riskier assets and their subsequent price inflation. Of course all of this is being done with the intention that with the new found wealth, people would go out and consume more and thus kick start the entire economic growth process. However, this does not seem to be happening. On the contrary, this is further widening the rich poor disparity and leading to other imbalances across the world. When this will come to end is anybody's guess but Das does believe that the time when everyone thinks that markets are priced to perfection is usually a dangerous time. And alarmingly, this feeling has entered into the minds of a lot of investors of late.

In the meanwhile, the Indian stock markets were witnessing some pressure as selling activity increased during the post noon trading session. At the time of writing, the BSE-Sensex was trading lower by 25 points or 0.1%. Barring stocks from the FMCG, realty and healthcare spaces, selling activity was witnessed across the board. Asian markets ended the day on a weak note today. While Japan ended higher by 0.6%, China closed lower by 0.2%. European markets were trading weak at the time of writing.

 Today's investing mantra
"The secret to investing is to figure out the value of something - and then pay a lot less" - Joel Greenblatt

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