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Big investors blocking Nestlé’s royalty increase is another sign of the rise of institutional activism in India.

It is not every day that a resolution supported by the promoters of a leading multinational like Nestlé provokes strong dissent. It is indeed remarkable.

What is more significant is the growing trend of investor activism, which is beneficial for minority investors seeking returns from their investments in listed stocks.

Having voices at the high tables who will advocate for their interests is a welcome change. Is this a lasting trend or just an aberration?

There is some evidence to suggest that the first solution is more likely. But before we go there, let’s take a closer look at what happened at the Nestlé shareholders’ meeting.

Dissent against royalty

Nestlé India shareholders have voted against a resolution to increase royalties paid to its parent company for supporting research and development by 0.15% per year for five years, taking the payment from the current 4.5% to 5.25% by the end of the period.

According to reports, one of the main reasons for this dissent was the lack of justification for such a payment, considering the Indian unit’s contribution to research and development expenditure compared to its share of global revenues.

Regardless, it is notable that several foreign investors and some prominent domestic institutions may have voted against this decision, thereby exercising their right to vote. On the other hand, most non-institutional investors followed the management line.

Among institutional shareholders, 71% voted against the decision, while among non-institutional investors, just 2% expressed opposition. This clearly indicates that activism was clearly institutionally driven, and this will likely be a key trend in the future.

Shareholder categoryIn favourAgainst
Public institutions29.15%70.85%
Non-public institutions97.67%2.33%

Source: ESB

Source: ESB

Growing institutional activism

The increase in institutional voter activism is quite noticeable, but it is still not significant given the relatively low turnout at most companies.

Investor advisory firm IiAS, in its annual voting study published last June, observed that “institutional shareholder dissension around resolutions is increasing, reflecting their change in approach: where previously the focus was on financial numbers, many are now focusing on compensation, capital allocation and transparency. ”

Figures from the report indicate that of the 4,991 resolutions put to vote by NIFTY 500 companies in 2022, only 24 were rejected.

Institutional investors voted against 6.3% of resolutions compared to 5.6% the previous year.

The growing number and type of institutional investors investing in India is also driving activism.

This leads to the growing role of proxy advisors applying global governance standards to Indian companies.

The IiAS observes in the case of Linde India, which could well apply to Nestlé: “Global companies find it difficult to deal with listed subsidiaries in India, given that in most markets they operate through intermediary of wholly owned subsidiaries. It’s not necessary.

The same governance framework that applies to the parent company and globally should also apply to businesses in India. Loyalty to the parent company is one thing, but it cannot come at the expense of duty of care to the public shareholders of a listed company. »

SEBI on the front foot

A more proactive and “pragmatic” approach by the Securities and Exchange Board of India (SEBI) is likely to encourage minority investors.

The market regulator has taken a tough stance against the promoters of Zee Entertainment over the alleged misappropriation of funds. Promoters Subhash Chandra and Punit Goenka were barred from holding office in the group entities.

Most recently, it sought an independent assessment by an NSE-appointed assessor to check the business division between Linde India and the Praxair Group arm, to protect minority investors.

Even regarding allegations of ICICI Bank staff influencing ICICI Securities shareholders, the regulator is reportedly looking into the matter.

Such cases have sent a clear message that transparency and the protection of minority interests are priorities for the market regulator.

India booming

India’s ambition to become the world’s third largest economy by 2031 and a developed economy by 2047 is likely to keep the economy at the forefront of interest from foreign investors and global businesses.

Given this, few would want to send the wrong signals to regulators or local investors.

Growing geopolitical tensions, which increasingly lead to distancing between the United States and China, should also work in India’s favor.

Add to that production-related incentives that attract more investment in manufacturing and India’s wealthy class, and you have a heady cocktail for foreign money.

The need for public activism

As institutions become more vigilant, it is also time for other public shareholders to take an active interest in the companies in which they hold stakes.

Individuals too must start voting with their feet. Only then will minority investors really have a say.

A better future for businesses and investors, with better governance, greater accountability and protection against actions contrary to the general good.

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