Paytm, proxy advisories and India’s puzzling lack of shareholder activism

It was not just that Sharma would be facing shareholders who have seen nearly two-thirds of their investment wiped out in the Paytm share’s freefall after listing. Its issue price of ₹2,150 a share had helped make the ₹18,300 crore Paytm issue the biggest IPO in Indian stock market history.

Not only did the stock lose massively on listing, it has by and large maintained a downward trajectory, even trading at a whopping 75 per cent discount to its issue price when it hit its lifetime low. While the CEOs of any company which has logged losses both on its profit and loss account and its share price would naturally expect shareholder flak, Sharma faced a sterner test–his very continuation at the helm of the company which he has steered since inception.

For the first time ever, all three registered domestic proxy advisory firms—Institutional Investor Advisory Services (IiAS), InGovern Research Services and Stakeholders Empowerment Services (SES)—have advised shareholders to vote against a resolution which proposes to reappoint Sharma as MD and CEO, as well as other relations relating to his remuneration, and the reappointment of the company’s chief financial officer.

All three had different reasons for their recommendation. IiAS pointed to Paytm’s continued failure to make the company profitable despite having promised to do so multiple times in the past (Paytm’s consolidated losses rose to ₹2,396 crore in FY 22), while the others were worried about Sharma getting board permanency since he was not liable to retire by rotation, as well as “excessive” concentration of power in Sharma’s hands as he was the Chairman as well as the CEO.

Whether or not Sharma survives the test is of concern to Paytm’s shareholders. But the issues raised by the voter advisory firms ought to be of concern, not only to all those who invest in the stock markets, but also to regulators and others charged with upholding corporate governance standards in publicly listed companies.

The call to oust Sharma raises three critical issues of wider significance than what will happen in that one company. One, the extent to which managements—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 must be held accountable.

Indian investors—whether of the individual or the institutional kind—have by and large tended to be remarkably lenient as far as the accountability of promoters and key management personnel is concerned. Unlike, say an Exxon Mobil, where an activist hedge fund managed to unseat as many as three of its board members last year, and where a coalition of investors is now calling for axing CEO Darren Woods, there have been remarkably few instances where shareholders have punished managements for non-performance. And India has—at least in the post-reform period—seen very few hostile takeover attempts.

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

It is here that institutional investors—especially mutual funds and insurance companies, which manage large amounts of public funds—can play a critical role in not only ensuring better corporate governance but safeguarding the interest of individual and minority shareholders.

That they have by and large failed to do so has often been attributed to a lack of bandwidth. High-level investors with stakes in multitude of companies often lack the time or the expertise to closely watch the performance of the companies they have invested in. It is here that proxy advisories play a vital role in providing detailed data and research to institutional investors and flagging issues which may have escaped their attention.

This critical role played by advisories calls for the highest standards of corporate governance and ethical practice on their parts. Adverse recommendations by advisories have usually been countered by managements with charges of vested interests, bias or even outright criminality such as blackmail.

SEBI has made some attempts to enforce higher transparency and accountability for advisories with regulations that mandate disclosure of their voting recommendation policies, sharing recommendations with the target company and giving them reasonable time to respond, and to fix a strict timeline for correcting errors and omissions of material information. It is also mandatory for advisories to not only disclose potential conflicts of interest but set in place processes to manage and mitigate such conflicts.

While there has been some criticism of SEBI’s moves 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, in holding managements accountable, it is critical that advisory firms, like Caesar’s wife, are not only beyond suspicion, but seen to be beyond suspicion.

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