Shareholder activism in India is on the rise. The number of dissents by institutional shareholders has increased 44 percent, according to a recent report by a shareholder advisory firm. The biggest source of such dissent has been the employee stock options, the full form for ESOP.

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“What investors want to see is either stock options are issued at market price, in which case there is significant alignment with their interest or issued at a deep discount; there is a certain performance requirement for the stock options to best. It's basically this gap between how companies look at stock options and how investors are looking at stock options, which is creating dissonance, and therefore, you are seeing a certain degree of pushback,” said Hetal Dalal, President & COO of Institutional Investor Advisory Services (IiAS), in a conversation with CNBC-TV18.

Most resolutions that faced dissent related to board changes, remuneration and ESOPs. As per the report, 97 percent of resolutions were still passed due to high promoter holding in companies.

Managements view ESOPs as deferred compensation and frequently propose issuing ESOPs at a discount whereas investors view ESOPs as pay at risk and desire a more durable alignment and thus wanted ESOPs issued at or close to the market price.

Issues like related-party transactions, restrictions on the power of the board also saw dissent, according to the report.

Companies like Coromandel International, Cholamandalam Investments, Carborundum Universal and EID Parry India have faced dissent from shareholders in recent times. Dissent was lowest for Nifty 50 companies.

Shareholders who practise activism typically use their ownership stake and voting rights to advocate for changes in corporate strategies, governance practices, executive compensation, social and environmental policies, and other matters that they believe will enhance shareholder value.

However, ESOP is only one bone of contention. Both Dalal and Pranav Haldea, MD of Prime Database, believe that shareholders, particularly the big ones, have become more vocal. “Over the years, we have seen that the trendline is very clear that institutional investors have been far more vocal in their dissent on shareholder resolutions and some of the issues which companies are bringing up than they were before. It's no longer passive."

Why shareholders should watch out for minority votes against resolutions

India's corporate landscape is predominantly characterized by promoter-controlled companies, where resolutions typically align with the interests of the promoters. According to Haldea, these votes can indicate potential concerns raised by institutional shareholders.

“In the last 10 to 12 years, institutional holding has gone up from about 27 percent to 37 percent in India. So, more institutional investors are coming into companies, which is why the metric to consider is how many such institutional investors are voting against some of these resolutions. And as our report shows, this number has gone up 3x in the last two years, which is a significant increase,” said Haldea.

For the entire discussion, watch the accompanying video

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