Governance Watch. Shareholder Activism in September OCTOBER Volume :10

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1 INGOVERN RESEARCH SERV ICES Governance Watch OCTOBER 2017 Volume :10 Shareholder Activism in September Mailing Address: 369, 9th Cross, 29th Main, HSR Layout Sector 1, Bangalore Contact: (+91) Shareholder activism has really arrived in India. This can be proven by the fact that there have been many instances in the current proxy season where shareholders have stood up to the management rather than be mere spectators of mismanagement in listed companies. Another positive takeaway has been that many of these not only involved individual cases of a retail shareholder but also larger funds and institutional investors voicing concerns against the boards and management and taking active steps to address them. As the month of September went by, we witnessed two cases of shareholder activism here in India. It involved three investors and two listed companies. While one of them is a foreign fund, the other two are India based investors. The cases are: IDBI Trusteeship Services and India Horizon Fund vs Religare & Florintree Advisors vs PTC India. We discuss both the cases in brief. Reach us at: info@ingovern.com Visit us at: Inside this issue: Religare Enterprises Limited is facing two lawsuits filed by two investors in September. While one of these suits is filed by IDBI Trusteeship Services Limited in the Bombay High Court, the other is by its shareholder India Horizon Fund Limited in the New Delhi bench of NCLT. As per the suit filed in Bombay High Court, IDBI Trusteeship, on May 21, 2014, had subscribed to debentures of SGGD Projects Development Pvt. Ltd. worth Rs. 335 Crore. SGGD Projects is a public shareholder of Religare holding 75,01,005 equity shares constituting 4.20% of its equity share capital. These debentures were secured by four entities, three of which are public shareholders and one is a promoter of Religare, pledging 3,18,51,891 equity shares of Religare. The share pledge agreement, which involved 2,75,68,309 equity shares constituting 15.45% of the equity share capital of Religare restricted the pledgers from exercising their voting rights in respect of the pledged shares for proposals that may have adverse effect on the shares pledged with IDBI Trusteeship. The agreement further stated that if the security becomes enforceable and voting notice is issued, IDBI Trusteeship can vote on such proposals. Subsequently, SGGD Projects and the other pledgers defaulted in making the payments. Shareholder Activism Revision in Secretarial Standards Proxy Season 2017 so far... We are in News On August 8, 2017 Religare notified the stock exchanges of a postal ballot meeting seeking approval for investment of Rs. 500 Crore in Religare Capital Markets Limited (RCML), a 100% subsidiary. The explanatory note stated that RCML is a loss-making entity and the entire investment of Rs. 500 Crore will be written off in the accounts of Religare. Fearing that this investment would result in diminution in the value of shares of Religare pledged in favour of it, IDBI Trusteeship issued notice to exercise its voting rights as provided under the share pledge agreement.

2 Page 2 Shareholder Activism in September (contd) IDBI Trusteeship had filed the lawsuit to restrict the pledgers in exercising their voting rights on the proposal. The High Court, in its judgment dated September 13, 2017 allowed IDBI s plea and directed Religare to discard any votes cast by the pledgers on the resolution and it also set a further date for continuation of the case. Religare issued its voting results of the postal ballot on September 11, 2017 stating that the proposal has been approved with requisite majority after ignoring the votes cast by the pledged shares with IDBI Trusteeship. As per the voting result, the proposal garnered 55.63% approval of voting public shareholders inspite of 99.95% institutional shareholders voting against it. Promoters were not allowed to vote since it was a related party transaction. What is not clear is whether IDBI Trusteeship did actually exercise its voting rights on the resolution and if so, whether its votes were taken into consideration after ignoring the votes of the pledgers. There has been no further stock-exchange notification by Religare in this regard. The second petition against Religare is by India Horizon Fund in the New Delhi Bench of NCLT. The suit was filed under sections 241, 242 and 244 of the Companies Act, These Sections empowers shareholders to approach NCLT against oppression and mismanagement in their companies. India Horizon Fund owns 6.15% of the equity share capital of Religare. Through its petition, India Horizon Fund sought stay on postal ballot resolution for investment of Rs. 500 Crore in RCML, cancellation of an AGM resolution to raise up to Rs. 500 Crore through issue of NCDs, and Removal of existing board and appointment of administrator to oversee affairs of the company A petition under these sections require shareholders to own at least 10% of equity shares of the company. India Horizon Fund submitted a consent letter by IDBI Trusteeship stating that voting rights owned by both would be higher than the 10% requirement limit. However, the bench rejected the consent of IDBI Trusteeship because of its involvement in the suit in the Bombay High Court which is subjudice. Further, the bench has agreed for a later date to decide on the case and India Horizon Fund s pleas. While the above instance was the unusual route of shareholder activism through the legal channel, the next case is of that through a shareholder proposal. PTC India Limited, through a stock exchange notification dated September 15, 2017 notified an addendum to its AGM on September 25, 2017 in form of a shareholder proposal by Florintree Advisors Private Limited which is seeking appointment of Mr. Mathew Cyriac as a Director. There are no further details provided by the Company. This proposal is similar to the one proposed by another investor two months ago, i.e. Unifi Capital in case of Alembic Ltd.

3 Page 3 Shareholder Activism in September (contd) However, the main difference is that while Unifi Capital had sought appointment of a small shareholder under Section 151 of the Companies Act, 2013 by rallying support of around thousand small shareholders, Florintree Advisors is proposing appointment through Section 160 which is the usual route for appointment of a director to the board. This would require a simple majority of votes to be in favour for its approval. Both the proposals by Unifi Capital as well as Florintree Advisors are as a result to the board and management s inaction to address the undervaluation of equity shares of the company for a long period of time. A point to note is that while Alembic s board refused to even table Unifi Capital and thousand small shareholders proposal in front of shareholders, the board of PTC India has added and tabled Florintree Advisors proposal to its AGM agenda. As per the voting results of the AGM notified by PTC India on September 26, 2017, the shareholder proposal was defeated as it received 29.29% votes in its favour.

4 Page 4 Revision to Secretarial Standards 1&2 The Institute of Company Secretaries of India ( ICSI ) which mandates various secretarial standards to be followed by Company Secretaries of public companies in India, has recently revised its Secretarial Standard-1 ( SS-1 ) and Secretarial Standard-2 ( SS-2 ). While SS-1 relates to conduct of Board Meetings, SS-2 is mandated for conduct of Shareholder Meetings. These revisions will be effective from the first date of this month, i.e., October 1, We discuss the key changes made in these secretarial standards. Secretarial Standard-1 (Board Meetings) Definition of Board Committees Existing: A committee meant any committee of Directors constituted by the Board Revised: A committee now means a Committee of Directors mandatorily required to be constituted by the Board under the Act Takeaway: Now, secretarial standards will be applicable only on board committees that are mandatorily constituted under the Companies Act, These are: Audit Committee, Nomination & Remuneration Committee, Stakeholder Relationship Committee and CSR Committee Definition of Secretarial Auditor Existing: Secretarial Auditor meant a Company Secretary in Practice appointed in pursuance of the Act to conduct the secretarial audit of the company Revised: Secretarial Auditor now means a Company Secretary in Practice or a firm of Company Secretary(ies) in Practice appointed in pursuance of the Act to conduct the secretarial audit of the company Takeaway: Secretarial firms have also been included to act as Secretarial Auditors of companies Day of holding Board Meeting Existing: A Board meeting (new and adjourned) couldn t be held on a national holiday Revised: A Board meeting (new and adjourned) can now be held on any day Takeaway: It is now possible to hold board meetings on national holidays Notice of the Meeting Existing: Notice of the Meeting was required to mention the venue if done through Electronic mode Revised: Notice of the Meeting should clearly mention the venue Takeaway: The standards now mandate mentioning the venue of board meetings irrespective of whether electronic mode for participation is provided or not

5 Page 5 Directors Participation through Electronic Mode Existing: Directors could participate through electronic mode in Board and Audit Committee meetings, for discussion on certain restricted items, only if permitted by the chairman of the board. Some of these restricted items included approval of the annual financial statement, Board s report, prospectus and matters relating to amalgamation, merger, demerger, acquisition and takeover, etc Revised: Now, directors cannot participate through electronic mode in Board and Audit Committee meetings, for discussion on these restricted items Takeaway: The revision explicitly restricts directors participation through electronic mode in discussion of these important agendas such as approval of financials, prospectus, mergers and acquisitions, etc. This is in-line with requirements of Companies Act Mode of sending Meeting Notice Existing: Meeting notice could be sent to directors either by hand or by post, courier, facsimile, or any other electronic means Revised: Meeting notice can be sent to directors either by hand or by post, facsimile, or any other electronic means. However, in case of shorter notice, the company may choose an expedient mode of sending Notice. Takeaway: The revision excludes courier facility for sending meeting notice to directors unless in case of meetings conducted in shorter notice Maintenance of Proof of sending of Notice Existing: Proof of sending Notice and its delivery was to be maintained by the company Revised: Proof of sending Notice and its delivery shall be maintained by the company for such period as decided by the Board, which shall not be less than 3 years from the date of the Meeting Takeaway: It is now mandatory for all companies to maintain copy of proof of sending of notice at least for 3 years from the date of meeting Extra Items that are not included in Agenda Existing: Any item not included in the Agenda was to be taken up for consideration with the permission of the Chairman and with the consent of a majority of the Directors present in the Meeting, which would include at least one Independent Director, if any Revised: Any item not included in the Agenda may be taken up for consideration with the permission of the Chairman and with the consent of a majority of the Directors present in the Meeting. The decision taken in respect of any other item shall be final only on its ratification by a majority of the Directors of the Company, unless such item was approved at the Meeting itself by a majority of Directors of the Company Takeaway: The approval of an independent director for such extra items is not required anymore. However, it has to be ratified by majority of directors of the company

6 Page 6 Frequency of Board Meetings Existing: The Board had to meet at-least once in every quarter, with a maximum interval of 120 days between any two consecutive Meetings, such that at least 4 meeting were held in each calendar year. Revised: The Company shall hold at least four Meetings of its Board in each Calendar Year with a maximum interval of one hundred and twenty days between any two consecutive Meetings Takeaway: There is no need to hold Board Meeting in each Calendar Quarter Interested Director for the purpose of Quorum Existing: A Director was treated as interested in a contract or arrangement entered into or proposed to be entered into by the company with the Director himself or his relative Revised: (New Insertion) If the item of business is related party transaction, then he shall not be present at the Meeting, whether physically or through Electronic Mode, during discussions and voting of such item Takeaway: Now, interested directors will not be able participate in discussion of businesses where they are interested Attendance Register Existing: The attendance register was deemed to have been signed by the Directors participating through Electronic Mode, if their attendance was recorded by the Chairman or the Company Secretary in the Attendance Register and the Minutes of the Meeting Revised: The attendance register shall be deemed to have been signed by the Directors participating through Electronic Mode, if their attendance is recorded in attendance register and authenticated by the Company Secretary or where there is no Company Secretary, by the Chairman or by any other Director present at the Meeting, if so authorized by Chairman and the fact of such participation is also recorded in the Minutes Takeaway: Authentication or recording of attendance can be now done by any Director present at the Meeting, if so authorized by Chairman Custody of Register Existing: Where there was no Company Secretary, the attendance register could be kept in the custody of any director authorized by the Board of this purpose Revised: Where there is no Company Secretary, the attendance register shall be in the custody of any other person authenticated by the Board of this purpose Takeaway: Now, any directors authenticated by the Board can be in charge of custody of the attendance register

7 Page 7 Inspection of Attendance Register Existing: The attendance register was open for inspection by the Directors Revised: The attendance register is open for inspection by the Directors. Even after a person cease to be a Director, he shall be entitled to inspect the attendance register of the Meeting held during the period of his Directorship Takeaway: Now, a Director after retirement can inspect the Attendance Register for the period of his Directorship Leave of Absence Existing: Leave of absence was to be granted to a Director only when a request for such leave has been received by the Company Secretary or by the Chairman Revised: Leave of absence shall be granted to a Director only when a request for such leave has been received by the Company Secretary or by the Chairman or to any other person authorized by the Board to issue Notice of the Meeting Takeaway: Now, leave of absence can be granted by any person authorised by the Board Passing of Resolution by Circulation Existing: Proof of sending and delivery of the draft of the Resolution and the necessary papers was to be maintained by the company Revised: Proof of sending and delivery of the draft of the Resolution and the necessary papers shall be maintained by the company for such period as decided by the Board, which shall not be less than three years from the date of the Meeting. An additional two days shall be added for the service of the draft Resolution, in case the same has been sent by the Company by speed post or by registered post or by courier Takeaway: Now, proof of sending of Notice has to be maintained by the Company for at least 3 years. Also, 2 additional days shall be added for the services of the draft resolution, in case the same has been sent by the Company by speed post or by register post or by courier Recording of appointments made at the Meeting Existing: All appointments made one level below Key Managerial Personnel were to be noted by the Board Revised: This has been removed Takeaway: Now, appointment made one level below KMP is no longer required to be noted by the Board

8 Page 8 Recording of Minutes Existing: Any unsigned document, including report or notes placed before the Board and referred to in the Minutes were to be identified by initialing of such document, report or notes by the Company Secretary or the Chairman. Wherever any approval of the Board was to be taken on the basis of certain papers laid before the Board, proper identification was to be made by initialing of such papers by the Company Secretary or the Chairman and a reference thereto shall be made in the Minutes Revised: Wherever the decision of the Board is based on any unsigned documents including reports or notes or presentations tabled or presented at the Meeting, which were not part of the Notes on Agenda and are referred to in the Minutes, shall be identified by initialing of such documents by the Company Secretary or the Chairman Takeaway: Only unsigned documents placed before the Board, in respect of items requiring decision of the Board, need to be so initialed. Thus, certain papers placed for noting and/or papers which have been already signed by the Chairman, Director or any other official of the company need not be initialed again Maintenance of proof of sending draft Minutes Existing: Proof of sending draft Minutes and its delivery was to be maintained by the company Revised: Proof of sending draft Minutes and its delivery shall be maintained by the company for such period as decided by the Board, which shall not be less than three years from the date of the Meeting Takeaway: It is now mandatory for companies to maintain proof of sending of draft minutes at least for 3 years from the date of meeting Disclosures Existing: The Annual Report and Annual Return of a company had to disclose the number and dates of Meetings of the Board and Committees held during the financial year indicating the number of Meetings attended by each Director Revised: The Report of the Board of Directors shall include a statement on compliances of applicable Secretarial Standards Takeaway: This is major change. Board of Directors now has to mention a statement in its Directors Report that Company is in compliances with applicable Secretarial Standards Applicability Existing: The standard was applicable on the Section 8 Companies Revised: The standard shall not be applicable on One-Person companies and Section 8 companies Takeaway: The revision exempts applicability of the standards on One-Person companies and Section 8 companies

9 Page 9 Secretarial Standard-2 (Shareholder Meetings) Notice on the Website Existing: In case of companies having a website, the Notice was required to be hosted on the website Revised: In case of companies having a website, the Notice shall simultaneously be hosted on the website till the conclusion of the meeting Takeaway: Now companies have to publish the notice of General Meeting till the conclusion of meeting. This means, it is not mandatory to keep notice on website after the conclusion of the meeting Notice on stating of Resolutions Existing: In respect of items of Ordinary Business, Resolutions were not required to be stated in the Notice except where the Auditors or Directors to be appointed are other than the retiring Auditors or Directors Revised: In respect of items of Ordinary Business, Resolutions are not required to be stated in the Notice Takeaway: Now there is no need to give the resolution in Notice in case of ordinary businesses Form of Proxy Existing: An instrument appointing a Proxy was to be either in the Form specified in the Articles or in the Form set out in the Companies Act Revised: An instrument appointing a Proxy shall be in the Form prescribed under the Act Takeaway: Now, companies cannot on their own discretion design the proxy form through their Articles Proxies and Authorizations Existing: No such clause Revised: In case of remote e-voting: (i) The letter of appointment of representative(s) of the President of India or the Governor of a State; or (ii) The authorization in respect of representative(s) of the Corporations; shall be received by the scrutinizer/ company on or before close of e- voting Takeaway: A new clause has been introduced for President/ Governor for appointment of a representative and for Corporations to authorize their representative, so they can participate in a meeting till on or before close of e-voting

10 Page 10 Voting on Resolutions Existing: Every Resolution was to be proposed by a member and seconded by another member Revised: Every Resolution, except a resolution which has been put to vote through remote e- voting or on which a poll has been demanded, shall be proposed by a Member and seconded by another member Takeaway: This revision accommodates e-voting practice used in general meetings Voting on Related Party Transactions Existing: A Member who is a related party is not entitled to vote on a Resolution relating to approval of any contract or arrangement in which such Member is a related party Revised: A member who is a related party is entitled to vote on a Resolution pertaining to approval of any contract or arrangement to be entered into by: a) A Government company with any other Government company; or (b) An unlisted Government company with the prior approval of competent authority, other than those contract or arrangements referred in clause (a) Takeaway: Government companies are allowed to vote on related party transactions Declaration of Results in case of e-voting Existing: Based on the scrutiniser s report received on Remote e-voting and voting at the Meeting, the Chairman or any other Director was authorized to countersign the scrutiniser s report and declare the result of the voting forthwith with details of the number of votes cast for and against the Resolution, invalid votes and whether the Resolution has been carried or not Revised: The scrutiniser(s) shall submit his report within three days from the date of the Meeting (seven days in case of postal ballot) to the Chairman or a person authorized by him, who shall countersign the same and declare the result of the voting forthwith with details of the number of votes cast for and against the Resolution, invalid votes and whether the Resolution has been carried or not Takeaway: Now, scrutinisers have to submit their report within three days Adjournment of meetings Existing: If a Meeting, other than a requisitioned Meeting, stood adjourned for want of Quorum, the adjourned Meeting was to be held on the same day, in the next week at the same time and place or on such other day, not being a National Holiday, or at such other time and place as determined by the Board Revised: If a Meeting, other than an Annual General Meeting and a requisitioned Meeting, stands adjourned for want of Quorum, the adjourned Meeting shall be held on the same day, in the next week at the same time and place or on such other day or at such other time and place as may be determined by the Board Takeaway: Now, adjourned meetings can be held at National holidays

11 Page 11 Maintenance of Minutes Existing: Minutes may be maintained in electronic form in such manner as prescribed under the Act and as may be decided by the Board. Minutes in electronic form was to be maintained with Timestamp. Minutes Books was to be kept at the Registered Office of the company or at such other place, as may be approved by the Board Revised: A company may maintain its Minutes in physical or in electronic form. Minutes Books shall be kept at the Registered Office of the company Takeaway: Two changes. No need of time Stamp on Electronic Minutes. Minutes book can be kept only at the registered office of the Company Content of Minutes Existing: Minutes were to state the name of the company, day, date, venue and time of commencement and conclusion of the Meeting Revised: Minutes shall state, at the beginning the Meeting, name of the company, day, date, venue and time of commencement of the Meeting Takeaway: No need to mention the time of conclusion of General Meeting

12 Page 12 The Proxy Season 2017 so far... There were 925 shareholder meetings scheduled in September whose meeting details were collected by InGovern. These included 855 AGMs, 8 EGMs, 54 Postal Ballots and 8 CCMs. Some of the large companies that held meetings during September are: AGMs Apollo Hospital Bosch BPCL Coal India GAIL India HCL Tech Hindalco Indiabulls Housing Maruti NTPC ONGC Powergrid Others Reliance Inds Asian Paints Yes Bank Bharti Airtel Ambuja Cem Lupin Bharat Forge VIP Inds Religare Ent. Please write to us at info@ingovern.com for vote recommendations on any company. We are in the News! Times of India: Minority investors rush to be part of cos mgmt. (Click here) Now, minority/institutional shareholders can utilise various regulations like the Bankruptcy Code or provisions in the Companies Act to drive better financial returns or voice concerns of financial wrongdoings. But for the move to be impactful, involvement and support of other institutional investors like mutual funds (who are at times passive) will be crucial to achieve their objective Economic Times: PwC arm moves SEBI to settle Satyam fraud case (Click here) Since this could be a precedent-setting move, one hopes that Sebi's decision will carry enough heft to act as a deterrent in the future Business Today: A Board Seat (at Alembic) (Click here) Though there were many incidents of shareholders demanding change of directors or initiating action against board or management decisions, small shareholder activism is not familiar to India as it requires a motivated investor and some effort and time to bring together 1,000 such shareholders to a consensus Business Standard: Proxy advisory movement likely to emerge stronger from ITC case (Click here) This only shows the increasing influence of proxy advisory firms that companies of the size of ITC are reacting in this manner. Proxy advisory firms are registered and regulated by SEBI and the main function is to put out voting recommendations and that is what IIAS has done. SEBI and institutional investors should come in support and should not allow ITC to muzzle proxy advisory firms in this manner. The court should summarily dismiss the case. Times of India: Tata Sons looks to shed its public ltd tag for pvt ltd (Click here) The move means less accountability, less transparency and less disclosures

13 ABOUT INGOVERN InGovern is India s first independent corporate governance research and advisory firm which assists shareholders and lenders that have financial or reputation exposure to companies. InGovern also assists companies in enhancing their corporate governance practices. InGovern is a SEBI registered Proxy Advisory firm. OUR SERVICES Corporate Governance Research Bespoke governance research and analysis of companies Annual governance evaluations of companies through Governance Radar proprietary framework Periodic Publication of special reports on corporate governance practices in India Corporate Governance Advisory Advisory to companies on enhancing their CG edifice by analyzing their existing corporate governance practices Benchmarking company practices with best practices Peer comparison of governance practices Diagnostic and Action Plan of governance practices Customized education and sensitization of Board and senior management on governance matters Proxy Advisory Voting Recommendations: Helping clients take informed voting decisions for shareholder meetings AGMs, EGMs, Postal Ballots and CCMs Corporate Governance Alert on interesting company proposals Publication of Annual Proxy Season Report Shareholder Activism Advising clients (investors and companies) on solutions for value enhancement Helping companies to connect with investors on voting decisions for shareholder meetings Communicating governance practices through market leading Investor Relations initiatives and white papers Advising companies on strategies, solutions and tools to enhance investor perception and enhance value for all stakeholders Disclaimer This report is proprietary and may not be reproduced in any manner without the written permission of InGovern Research Services Pvt. Ltd. ( InGovern ). While we have taken due care and caution in the compilation and presentation of the information and data in this report, no warranty is made as to the completeness, accuracy or utility of this analysis.