The Influence of Foreign Investors and Proxy Advisory Firms on Corporate Governance

Institutional investors have begun taking an active role in companies that have dispersed shareholding. This played out demonstrably in the case of HDFC in July when the chairman Mr. Deepak Parekh retained his position in the company by a narrow margin. This was attributable to a number of foreign institutional investors having voted against his continuation in the company. They did so on the basis of recommendations of the two US proxy advisory firms, ISS and Glass Lewis.

In a column in BloombergQuint titled “The Changing Face Of Shareholders: Outsourced Governance”, I explore two phenomena. The first is the rising influence of foreign shareholders in Indian listed companies. This includes both companies with dispersed shareholding as well as those with concentrated shareholding (where outside shareholders can make a difference on matters such as material related party transactions that are put to a “majority of the minority” voting). The second is the active role that the US proxy advisory firms in India have begun to play. While their involvement is useful in enhancing the corporate governance in Indian companies, there are some concerns in the manner in which they provide their voting recommendations based on published guidelines. In the end, institutional investors must refrain from entirely outsourcing their governance commitments, take greater responsibility for their decisions and perform an increasingly important stewardship role that will benefit their portfolio companies as well as their own investors.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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