The defeat of Nestle’s resolution to up royalty payments to its parent is a sign of the changing times and this can spell good news for minority investors in the times to come.
What's more significant is the growing trend of investor activism, which is good for minority investors who look to earn returns from investments in listed equities.
Having voices at high tables that will bat to protect their interests is a welcome change. Is this a durable trend or just an aberration?
There are pointers to suggest the former is more likely. But before we go there, let's first take a closer look at what transpired at the Nestle shareholder meeting.
Dissent Against Royalty
Shareholders of Nestle India voted against a resolution to raise royalty payments to its parent towards its research and development support by 0.15% a year for five years, taking the payout from the current 4.5% to 5.25% by the end of the period.
According to reports, a key reason for the dissent was the lack of justification for such a payout, given the Indian unit's contribution to research and development spending relative to its share of global revenues.
Be that as it may, it's notable that several foreign investors and some leading domestic institutions may have voted against the move, exercising their franchise. On the other hand, most non-institutional investors towed the management line.
Of the institutional shareholders, 71% voted against the move, while of the non-institutional investors, barely 2% expressed opposition. This clearly indicates that activism was clearly driven by institutions, and this is likely to be a key trend going forward.
Source: BSE
Rising Institutional Activism
That institutional voter activism is on the rise is quite discernible, but it is still not significant given the relatively low holding in most companies.
Investor advisory firm IiAS, in its annual voting study published last June, observed that "institutional shareholder dissent across resolutions is increasing, reflecting their changed approach: where previously the focus was on financial numbers, many now focus on compensation, capital allocation and transparency."
The numbers from the report indicate that of the 4,991 resolutions put to vote by NIFTY 500 companies in 2022, only 24 were defeated.
Institutional investors voted against 6.3% of the resolutions as compared to 5.6% in the previous year.
The growing number and type of institutional investors putting their money in India are also driving activism.
This is leading to the growing role of proxy advisors applying global governance standards to Indian companies.
IiAS observes in the case of Linde India, which could well apply to Nestle: "Global companies struggle to deal with listed subsidiaries in India, given that in most markets they operate through wholly owned subsidiaries. They need not.
The same governance framework that applies to the parent and globally should also apply to businesses in India. Loyalty to the parent is one thing, but it cannot be at the expense of the Duty of Care owed to public shareholders of a listed company."
SEBI on the front foot
A more proactive and "no-nonsense" approach from the Securities and Exchange Board of India (SEBI) is likely to embolden minority investors.
The market regulator took a tough stance against the promoters of Zee Entertainment with respect to the alleged misappropriation of funds. Promoters Subhash Chandra and Punit Goenka were barred from holding office in group entities.
More recently it called for an independent valuation by an NSE appointed valuer to ascertain the division of business between Linde India and group arm Praxair, in order to protect minority investors.
Even with respect to the allegations regarding ICICI Bank staffers influencing shareholders of ICICI Securities, the regulator is reportedly examining the matter.
Such instances have sent out a clear message that transparency and minority interest protection are priorities for the market regulator.
India on the rise
India's ambition to become the third-largest economy in the world by 2031 and a developed economy by 2047 is likely to keep the economy high on the interest radar for foreign investors and global businesses.
Given this, few would like to send the wrong signals to regulators or local investors.
The growing geopolitical tensions, which are increasingly leading to the US and China distancing themselves, are also likely to work in India's favour.
Add to this the production-linked incentives that are drawing more investments in manufacturing and India's large affluent class, and you have a heady cocktail for foreign money.
The need for public activism
While institutions are becoming more vigilant, it is also time for other public shareholders to take an active interest in the companies they have stakes in.
Individuals, too, need to start voting with their feet. Only then will minority investors truly have their say.
Here's to a brighter future for businesses and investors, with better governance, greater accountability, and protection from moves against the larger good.
ALSO WATCH: How experts reacted to the shareholder vote rejecting the increase in royalty
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What's more significant is the growing trend of investor activism, which is good for minority investors who look to earn returns from investments in listed equities.
Having voices at high tables that will bat to protect their interests is a welcome change. Is this a durable trend or just an aberration?
There are pointers to suggest the former is more likely. But before we go there, let's first take a closer look at what transpired at the Nestle shareholder meeting.
Dissent Against Royalty
Shareholders of Nestle India voted against a resolution to raise royalty payments to its parent towards its research and development support by 0.15% a year for five years, taking the payout from the current 4.5% to 5.25% by the end of the period.
According to reports, a key reason for the dissent was the lack of justification for such a payout, given the Indian unit's contribution to research and development spending relative to its share of global revenues.
Be that as it may, it's notable that several foreign investors and some leading domestic institutions may have voted against the move, exercising their franchise. On the other hand, most non-institutional investors towed the management line.
Of the institutional shareholders, 71% voted against the move, while of the non-institutional investors, barely 2% expressed opposition. This clearly indicates that activism was clearly driven by institutions, and this is likely to be a key trend going forward.
| NESTLE INDIA: VOTES ON ROYALTY | ||
| Shareholder Category | In favour | Against |
| Public Institutions | 29.15% | 70.85% |
| Public Non-Institutions | 97.67% | 2.33% |
| Total | 42.82% | 57.18% |
| NESTLE INDIA: INSTITUTIONAL HOLDING | |
| Institutional Shareholders | Holding |
| Mutual Funds | 4.45% |
| SBI NIFTY 50 ETF | 1.28% |
| AXIS ELSS TAX SAVER | 1.03% |
| Alternate Investment Funds | 0.09% |
| Banks | 0.02% |
| Insurers | 3.81% |
| Life Insurance Corporation (LIC) | 2.23% |
| Foreign portfolio investors (FPI) | 12.10% |
| Total Institutions | 20.47% |
| Promoters & Others | 79.53% |
Source: BSE
Rising Institutional Activism
That institutional voter activism is on the rise is quite discernible, but it is still not significant given the relatively low holding in most companies.
Investor advisory firm IiAS, in its annual voting study published last June, observed that "institutional shareholder dissent across resolutions is increasing, reflecting their changed approach: where previously the focus was on financial numbers, many now focus on compensation, capital allocation and transparency."
The numbers from the report indicate that of the 4,991 resolutions put to vote by NIFTY 500 companies in 2022, only 24 were defeated.
Institutional investors voted against 6.3% of the resolutions as compared to 5.6% in the previous year.
The growing number and type of institutional investors putting their money in India are also driving activism.
This is leading to the growing role of proxy advisors applying global governance standards to Indian companies.
IiAS observes in the case of Linde India, which could well apply to Nestle: "Global companies struggle to deal with listed subsidiaries in India, given that in most markets they operate through wholly owned subsidiaries. They need not.
The same governance framework that applies to the parent and globally should also apply to businesses in India. Loyalty to the parent is one thing, but it cannot be at the expense of the Duty of Care owed to public shareholders of a listed company."
SEBI on the front foot
A more proactive and "no-nonsense" approach from the Securities and Exchange Board of India (SEBI) is likely to embolden minority investors.
The market regulator took a tough stance against the promoters of Zee Entertainment with respect to the alleged misappropriation of funds. Promoters Subhash Chandra and Punit Goenka were barred from holding office in group entities.
More recently it called for an independent valuation by an NSE appointed valuer to ascertain the division of business between Linde India and group arm Praxair, in order to protect minority investors.
Even with respect to the allegations regarding ICICI Bank staffers influencing shareholders of ICICI Securities, the regulator is reportedly examining the matter.
Such instances have sent out a clear message that transparency and minority interest protection are priorities for the market regulator.
India on the rise
India's ambition to become the third-largest economy in the world by 2031 and a developed economy by 2047 is likely to keep the economy high on the interest radar for foreign investors and global businesses.
Given this, few would like to send the wrong signals to regulators or local investors.
The growing geopolitical tensions, which are increasingly leading to the US and China distancing themselves, are also likely to work in India's favour.
Add to this the production-linked incentives that are drawing more investments in manufacturing and India's large affluent class, and you have a heady cocktail for foreign money.
The need for public activism
While institutions are becoming more vigilant, it is also time for other public shareholders to take an active interest in the companies they have stakes in.
Individuals, too, need to start voting with their feet. Only then will minority investors truly have their say.
Here's to a brighter future for businesses and investors, with better governance, greater accountability, and protection from moves against the larger good.
ALSO WATCH: How experts reacted to the shareholder vote rejecting the increase in royalty
ALSO READ:
Copper prices top $11,000 a tonne to break March 2022 record — stocks to watch
Gold hits fresh record as Fed rate-cut optimism fuels demand
Of 20 biggest stock markets, 14 are at or near record highs
First Published: May 20, 2024 10:53 AM IST
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