Hearing Aids for India Inc

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Sebi should push for greater shareholder democracy

NOT TOO LONG ago, an equity analyst reduced his voice to a whisper and winked why he fancied India as the world champion of corporate governance some day. “It’s in the name Sebi,” he confided in a Gujarati accent, referring to the rule-setting authority of the Securities and Exchange Board of India that keeps watch of publicly traded companies, “Sebi just has to say be, and it is.”

At the helm of that onerous exercise will now be Ajay Tyagi, a bureaucrat who has just taken over from UK Sinha as regulator-in-chief. To be sure, Sebi has achieved plenty by way of reform over the past few years, especially in the wake of the Indian Companies Act, 2013. Audits are more stringent, disclosure norms much clearer, the Board oversight of a firm’s management more independent, and the rights of minority shareholders better guarded. Some grey areas of regulation still persist, such as the extent of a promoter’s liability in case of violations at a firm over which s/he has little control, a question thrown up by the Infosys spat, but these affect only a few and are fairly easy to sort out.

For shareholders at large, the big shift of the times has been Sebi’s institution of e-voting. Done four years ago, its aim was to get the sort of participation that dreary old postal ballots never do. The e-process isn’t quite as smooth as retail investors would like, but being offered resolutions to reject or approve online has observably shaken them out of inertia. If the problem was one of apathy, then India Inc’s recent eruptions of discord might well have shaken them out of that too. With disputes at Infosys and Tata having gone igneous, even aloof shareholders now seem keen to exercise their franchise. Every share, after all, has a vote.

The issues involved are not always ho-hum. Last year’s ballot sheet of Infosys not only had its stock options reward scheme up for a vote, it also had details of CEO Vishal Sikka’s compensation package up for approval. The Taj Group’s ballot had featured some utterly puzzling legal-babble on its Sea Rock acquisition, a ‘legacy issue’ that flared up later in Cyrus Mistry’s spectacular face- off with Ratan Tata. In both instances, shareholders find themselves scrolling back for old emails they’d been too busy to read (or decipher).

As first-time voters would notice, only mandatory items are put to an open vote, the choice offered is strictly binary—either ‘yes’ or ‘no’—and since all this has already been deliberated upon by the company’s management, every resolution appears to have ‘fait accompli’ stamped invisibly all over it. By orthodox theory as well as practice, this is how it’s supposed to be. Else, a company would not be able to function. It’s only in the event of an all-out shareholder revolt that a resolution gets turfed out, as happened last year at BP over Bob Dudley’s salary, and that could be highly disruptive.

Yet, and yet, given how eruptive India Inc is getting, Sebi would do well to shake things up. It could devise new mechanisms for companies to engage investors and thus compete with one another on a dormant front: shareholder relations. If a company as much as puts out alternatives to its proposals on a few items, for example, it would involve investors far more intimately with its business than ever before. Also, a company that opts to hold polls on more decisions—ones that demand no strategic secrecy—than specified by the regulator could possibly outscore rivals on investor loyalty. Some of these could take the form of referendums, advice that need not be acted upon, with a preference-ranking ballot designed to capture the voice of shareholders. What’s missing is a template for such an outreach.

One could argue that the complexity of it would slow a company down, but it’s also true that real-time networks could resolve that worry. At the theoretical level, heads have long been scratched over whether it makes any sense at all to solicit such a wide array of opinion to begin with. As Kenneth Arrow had proven in his Impossibility Theorem, if there are more than two options to be ranked, there’s no fair way to condense the individual preferences of many into a collective choice. But then again, as Amartya Sen has shown in his Nobel Prize-winning work, even this can be done: the solution is to record the depth of a voter’s preference (or lack thereof).

Even now, many Indian industrialists own such hefty chunks of their companies that the opinions of others scarcely matter. Perhaps this should give them the confidence to try something new. But first, Sebi has to say be.