The coming democratisation of India Inc.

In a quite surprising move, Barings Private Equity Asia exits Coforge, as India Inc. embraces board-driven, diversified shareholding.

Not many would have believed that Barings Private Equity Asia (BPEA), which owned nearly 70 percent stake in Coforge in 2019 would completely exit the company by selling its shares to a multitude of institutional investors. It wasn’t surprising, therefore, that many were caught off-guard when word got out that it had put its remaining nearly 27 percent stake on block for sale in a single tranche.

Fewer would have imagined that institutions with no strategic interest (nearly 50 of them for the last tranche) would be the buyers. After all, the perception so far has mostly been that control in a company would generally be sold only to strategics, as that would normally tend to fetch a premium. That may not be quite the case in this market flushed with investor money.

But while a large section of domestic investors were caught by surprise, the move was not out of the realm for BPEA, according to a detailed CNBC TV 18 news report.

And there’s reason enough for a global private equity investor to think in such a fashion. After all, some of the biggest companies globally are not promoter-owned or controlled and have no single shareholder wielding enough power to chart the course of the business.

Who owns Apple, Microsoft?

Do you know who the largest shareholder of Apple is? Microsoft? Interestingly, the top two shareholders of both are Vanguard Group and BlackRock with investments through their exchange-traded funds (ETFs). For Apple, the third biggest institutional investor is Warren Buffett’s Berkshire Hathaway, which owns about a billion shares or just under 6 percent of the company’s equity.

In fact, the top three institutions together hold just about 20 percent. In Microsoft’s case, the third largest institutional investor is State Street Corp with a tad over 4 percent, and in its case too, the top three institutions own just nearly 20 percent stake.

Some insider Individuals too have small stakes in these two megacorps. For Apple, the top three are the board chair Arthur Levinson, CEO Tim Cook and COO Jeff Williams. For Microsoft, it is CEO Satya Nadella, Chief Legal Officer Bradford L Smith and the Global Sales & Marketing chief Jean-Philippe Courtois.

From the above, it is quite evident that decision-making at these large corporations will have to be board-driven and subject to the approvals of a large diverse set of investors, making the process far more democratic.

Is that an ideal structure? That’s tough to tell. Like with nations, there has been progress for people across the world under various forms of governance. Democracy has its benefits and drawbacks as does any other form of governance. A lot depends on how the process is followed and executed.

What such a shareholding structure does, though is prevent the concentration of control in a few hands, which can create friction that should lead to more balanced outcomes.

Board-run companies not new to India

India isn’t new to the concept of board-run companies. Out two largest private banks are key examples. HDFC Bank and ICICI Bank are both companies with no identifiable promoter group. Institutions are the largest shareholders in these banks, and that hasn’t kept them from delivering the best performances in the sector.

In fact, the Reserve Bank of India as a policy would like to limit the sway of promoters—from maximum shareholding limits to key executive and board positions, the central bank has in place curbs on both.

Even in unregulated sectors like engineering & construction and consumer, we have Larsen & Toubro and ITC, which are board-driven companies. While equity holdings in L&T are widely distributed, ITC does have British American Tobacco (BAT) with a sizeable stake that is offset by large stakes of leading public sector insurers and the special undertaking of Unit Trust of India. The two companies are also very highly regarded by investors and enjoy much confidence.

Need for activism and regulatory action

With the democratisation of holdings, there is likely to be more investor activism, which is the need of the hour. Already we are seeing several institutional investors voting with their feet against management decisions on a wide range of issues from director appointments and remuneration to the adoption of accounts and M&A. This needs to gain traction as it likely will, with companies broad-basing their shareholdings.

But what is also needed, along with these changes, is a review of the rules and regulations that allow managements or promoters to retain control of companies even though they have very little ownership. The Securities and Exchange Board of India has ceased this matter and one hopes that all concerned regulators, including the Ministry of Corporate Affairs, will come together to address these issues through frameworks and rules that guard against such misuse of positions.

Investors must be vigilant

Investors in companies with no visible promoter to drive decisions need to pay more attention to board appointments and to appointments of key managerial personnel, as the future of these businesses will be charted by such key individuals. A change in any of these should be a reason to review your investment.

Also, issues raised by institutional investors and their proxy advisors must be given due attention, as these could significantly impact the performance of the investee company and/or its reputation and standing among large investors.

The good thing about diversified holding companies, on the other hand, though is that there is a high likelihood of some investor crying wolf if something is found amiss, and that could be an early warning sign to catch. So, wrongdoings and errors of judgment will likely come to light earlier than in closely controlled companies.

All-in-all, the democratisation of India Inc. should be a good thing for the retail investor. Relax, the times are about to change for the better.