|»5 Minute Wrap Up by Equitymaster|
On This Day - 4 JULY 2014
Can shareholders benefit from high activism?
In this issue:
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.
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.
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.
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