Even by the scant regard most Indian promoters have for the minority shareholder, the defeat of the special resolution to re-appoint Neeraj Kanwar managing director of Apollo Tyres—ostensibly because he’s taking home a remuneration that is disproportionate to the company’s profits and performance—should be a wake-up call for India Inc. One reason promoters have got away with poor governance is because institutional investors have traditionally voted with their feet, selling out of a stock rather than speaking up. That is why it is good news that the latter are now making their unhappiness public, via the ballot box. A good 56.5% of the institutional investors’ vote went against the special resolution that sought to re-appoint Kanwar while a big chunk of the retail investors—48.8%—also felt Kanwar should not be re-appointed. Since the number of winning votes need to be not less than three times the number of the votes cast against the resolution and in this case it was 2.6, it did not go through.
Shareholders are understandably miffed that Kanwar is taking home large sums at a time when the company has been performing poorly. In 2017-18, he made Rs 44.6 crore, which was 940 times that of the median remuneration of employees. This was even as the company reported a fall in profits of 34% and the compensation amount was 7.2% of the profits of Rs 622 crore. It is not immediately clear what the board of directors of Apollo Tyres felt about this, and to what extent this was discussed. Since the chairperson of the board is not an independent director, the board should have played a more active role in this case. Also, as proxy advisory firm IIAS has pointed out, the proportion of independent shareholders on the board is just 43% when 50% is required. The board should have red-flagged the matter, and the half a dozen independent directors needed to have taken the matter far more seriously.
Since this doesn’t seem to be happening, Sebi and the ministry of corporate affairs need to tighten the guidelines. Under Regulation 17(6) of the Sebi listing agreement, shareholders need to approve an annual remuneration payable to executive directors who are promoters if it exceeds Rs5 crore or 2.5% of the net profits, whichever is higher. This rule needs to be tightened further—perhaps remuneration should be capped at 2% of profits. IIAS estimates Kanwar’s future remuneration at a whopping Rs 60 crore. While a large part of this is performance-linked, there is no cap on commissions of up to 5% of net profits. That, again, needs to be capped at lower levels. Investors have every reason to feel cheated because the increase in Kanwar’s remuneration has outpaced the growth in revenues and profits for the past five years. The Apollo Tyres stock has lost some 20% since the end of March. Perhaps it is time to keep promoters from voting if one of them is the CEO or managing director; let minority shareholders alone vote. Corporate watchers expect the resolution will be put to vote again with Kanwar opting for a smaller remuneration. Since the promoters’ intent—namely, to take home as much as possible—is clear, investors should vote against Kanwar’s re-appointment again.
