Paytm, proxy notices and a puzzling lack of shareholder activism in India

One 97 Communications Limited, known to both investors and millions of its customers through its payment services app Paytm, has yet to disclose the outcome of the resolutions put to the vote at its first-ever annual general meeting as listed company. But the fact that the Paytm certificate closed on August 19, the day of the AGM, down almost two percent to 771, does not bode well for Vijay Shekhar Sharma, the founder and outgoing CEO of Paytm.

It wasn’t just that Sharma would face shareholders who saw almost two-thirds of their investment wiped out in the post-listing free fall of Paytm stock. Its issue price of 2,150 per share had helped make the 18,300 crore Paytm issue largest IPO in Indian stock market history.

Not only did the stock lose massively during its listing, but it has generally maintained a downward trajectory, even trading at a whopping 75% discount to its issue price when it reached its highest. low level. While the CEOs of any company that has posted losses to both its profit and loss account and its stock price would naturally expect criticism from shareholders, Sharma faced a tougher test – his very continuation at the head of the company he has been running since its creation.

For the first time ever, the three national registered proxy advisory firms – Institutional Investor Advisory Services (IiAS), InGovern Research Services and Stakeholders Empowerment Services (SES) – have advised shareholders to vote against a resolution that proposes to rename Sharma in as Managing Director and CEO. , as well as other relations relating to his remuneration, and to the renewal of the financial director of the company.

All three had different reasons for their recommendation. IiAS pointed to Paytm’s continued inability to make the business profitable despite promising to do so on several occasions in the past (Paytm’s consolidated losses reached 2,396 crore in FY22), while others feared that Sharma would get tenure on the board as he was not likely to retire on rotation, as well as ‘excessive’ concentration of power in the hands of Sharma as he was both chairman and CEO.

Whether or not Sharma survives the test worries Paytm shareholders. But the issues raised by voter advisory firms should be of concern not only to anyone investing in stock markets, but also to regulators and others charged with enforcing corporate governance standards at publicly traded companies.

The call to oust Sharma raises three critical questions of broader importance than what will happen in this company alone. First, the extent to which management, particularly chief executives, should be held accountable for performance. Second, the role of large institutional investors in listed companies. And last, but not least, the role of proxy advisory firms themselves and the governance standards to which they should be held accountable.

Indian investors, whether individual or institutional, have generally tended to be remarkably lenient when it comes to the liability of promoters and key management. Unlike, say, an Exxon Mobil, where an activist hedge fund successfully unseated up to three of its board members last year, and a coalition of investors is now calling for the removal of CEO Darren Woods. , there have been remarkably few instances of shareholders sanctioning management for non-performance. And India has – at least in the post-reform period – experienced very few hostile takeover attempts.

Apathy is dangerous. Recent corporate scandals have shown the danger of excessive power in the hands of powerful CEOs (NSE and ICICI Bank come to mind, as do several major corporate bankruptcies). As Finance Minister Nirmala Sitharaman pointed out in a recent speech, simply having corporate governance rules and regulations is not enough if compliance remains weak.

It is here that institutional investors – particularly mutual funds and insurance companies, which manage large amounts of public funds – can play a vital role not only in ensuring better corporate governance, but also to safeguard the interests of individual and minority shareholders.

Their failure to do so has often been blamed on a lack of bandwidth. High profile investors with stakes in a multitude of companies often lack the time or expertise to closely monitor the performance of the companies in which they have invested. This is where proxy notices play a vital role in providing detailed data and research to institutional investors and flagging issues that may have escaped their attention.

This critical role played by advisors demands the highest standards of corporate governance and ethical practice. Negative recommendations from reviews have typically been countered by management with accusations of vested interests, bias, or even outright criminality like blackmail.

SEBI has made some attempts to bolster the transparency and accountability of reviews with regulations that require disclosure of their vote recommendation policies, sharing of recommendations with the target company and giving them a reasonable time to respond, and setting a strict schedule for correcting errors and omissions of material information. It is also mandatory that notices not only disclose potential conflicts of interest, but put in place processes to manage and mitigate those conflicts.

Although SEBI’s actions have been criticized as “over-regulation”, given the nascent stage of shareholder activism in India and the failure of other institutional mechanisms, such as the board of directors, to hold responsible directions, it is essential that advisory services companies, like Caesar’s wife, are not only beyond suspicion, but seen to be beyond suspicion.

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