Proxy Voting Policy And Guidelines: IiAS
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IiAS VOTING GUIDELINES
1. ADOPTION OF FINANCIAL STATEMENTS
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Once a year
TYPE OF MEETING
AGM
COMPANIES ACT 2013
Sections 129 (2) and 134
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Ordinary
VOTES REQUIRED
More than 50%
KEY RISKS
1. Auditor Qualifications
2. High Contingent Liabilities
3. Opaque Related Party     Transaction
4. Change in Accounting Policies
5. High Leverage
6. Window Dressing
SUMMARY NOTES
IiAS does not provide voting recommendation on adoption of accounts.

IiAS does not provide voting recommendations on resolutions for adoption of financial statements but does provide commentary as a guiding tool to shareholders.

IiAS believes that a comprehensive review of the financials of a company is a critical exercise which often requires first-hand information and proper due diligence. Given the limited time between receipt of the audited accounts/annual report and the shareholder meeting.

Our commentary includes the following parameters:

  • Financial performance
  • Leverage profile
  • Related party transactions
  • Liquidity position
  • Audit integrity
  • Accounting policies
  • Transparency checks
- Movement in CFO/EBITDA
- Miscellaneous expenses to total income
- Contingent liabilities as a % of net worth
- Interest expense as a % of average debt
- Receivable Days

In cases where the auditors have qualified the accounts or made specific remarks on the accounting entries, IiAS highlights the auditor comments in the analysis.

Shareholders are encouraged to use the IiAS commentary as a guiding tool for voting on resolutions for adoption of accounts.

Refer to ANNEXURE A  (sample accounts page for manufacturing and services companies) and ANNEXURE B  (sample accounts page for banking/financial companies).




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2. AUDITOR (RE) APPOINTMENT AND REMOVAL
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Appoint - once in five years
Ratify - at every AGM (proposed to be done away with once the Companies (Amendment) Bill 2016 is passed by the Parliament)
TYPE OF MEETING
AGM
COMPANIES ACT 2013
Section 139: Appointment
Section 140: Removal
Section 142: Remuneration
Section 144: Non- audit Services
Section 148: Cost auditors
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Ordinary
Special (for change/removal of auditors)
VOTES REQUIRED
More than 50%,
75% (for auditor removal)
KEY RISKS
1. Auditor Tenure
2. Audit Partner Tenure
3. Track record of auditor
4. Employee of audit firm on the     board
5. Same auditor in many group     companies
6. High auditor fees
SUMMARY NOTES
The objectivity of the auditor determines the quality of the audit process.
RELATED RESEARCH
IiAS research and commentary can be viewed on its website iias.in. The list of articles relating to the resolution are:

The Act mandates rotation of individual auditors every five years and of the audit firm after a maximum period of ten years i.e. (after two terms of five years each) for listed companies. A cooling-off period of five years is required, to be considered eligible for re-appointment. The appointment is currently subject to ratification at each AGM, but this provision is proposed to be withdrawn (- subject to approval in Parliament). The provisions of the Act are applicable retrospectively; which means that the existing term of the auditors will be taken into account for computing the overall tenure. The Act has provided companies with a three-year window period to comply. Shareholders are also entitled to mandate (in case of an audit firm) internal rotation of the audit partner after such intervals as they may decide.

Section 144 of the Companies Act, explicitly prohibits Statutory Auditors from undertaking any assignment other than the Statutory audit with the Company.

IiAS policy on auditor (re)appointment is guided by the same principles as laid down in the regulations. Fundamentally, IiAS believes that auditor tenure of over 10 consecutive years blemishes the objectivity of the audit process and the independence of the auditor.

Best practices
IiAS recommends that a brief profile of the statutory audit firm and its partner and their relevant experience be provided at the time of appointment and reappointment.

Companies with single statutory auditor:

IiAS will recommend voting AGAINST vintage auditors (tenure >10 years).

Even though the regulations provide a three-year transition window (from 1 April 2014) for compliance, IiAS believes that good governance practices transcend regulatory requirements: companies must proactively rotate their auditors rather than wait for regulations that compel them to do so.

IiAS extends the above rationale while making voting recommendations on the reappointment of auditors in companies that are spin-offs of a larger company (for example, L&T Finance from L&T). For such companies, IiAS construes tenure to include the period during which when the company was being audited as a division of a larger company (prior to the spin-off into a separate company). Accordingly, IiAS will consider the aggregate tenure of auditors, which will include that with the parent company.

Companies with joint auditors:
  • If a joint auditor is appointed solely for the purpose of hand-holding and managing a transition to a new audit firm, IiAS will recommend voting FOR the reappointment of the vintage auditor.

  • In companies that already have joint auditors, IiAS will recommend voting AGAINST the reappointment of the auditor whose tenure exceeds ten years; and AGAINST the appointment of both auditors if their re-appointment is presented in a single resolution.

In order to apply the limit of ten years, IiAS will take into account the aggregate tenure of the auditor(s) and its network firms (wherever the statutory auditor is part of a larger network firm as given in Table 1).

As the three-year window for auditor transition is set to expire (with effect from 1 April 2017), IiAS will review its voting policy on the auditor appointment/re-appointment.

IiAS will continue to vote AGAINST the (re)appointment of auditors who have a poor market standing or a poor track record.

Table 1: Audit Network Firms

Deloitte PwC Ernst & Young (E&Y) KPMG
  • Deloitte Haskins & Sells
  • C C Chokshi & Co
  • SB Billimoria
  • Fraser & Ross
  • Touche Ross & Co
  • A.F Ferguson
  • Price Waterhouse
  • Price Waterhouse & Co.
  • Lovelock & Lewes
  • Dalal & Shah
  • SR Batliboi & Co
  • SR Batliboi & Associates
  • SV Ghatalia & Associates
  • P D Desai & Co,
  • SRBC & Co LLP
  • BSR & Co
  • BSR & Associates
Source: IiAS Research, Market
Median Auditor Tenures
*as on 31 March 2015

IiAS may red-flag cases where the auditor remuneration is not commensurate with the size and scale of the company, is disproportionately high compared to peers, or has moved up significantly since their appointment.

Auditor (Re)Appointment in Public Sector Units (PSU)
The appointment of auditors in PSUs directly vests with the Comptroller and Auditor-General of India (CAG). The CAG generally appoints multiple auditors and frequently rotates these firms. Consequently, auditor tenure for PSUs is substantially lower.

IiAS will generally recommend voting FOR auditor (re)appointments in PSUs as the process is directly supervised by a constitutional authority and auditors are proactively rotated.

Removal of auditor

Under Section 140 of the Act, an auditor may be removed from office before the expiry of its term by passing a special resolution and after obtaining approval from the Central Government.

IiAS believes that the statutory auditors are entrusted with the critical role of scrutinizing the company’s accounts. Therefore, IiAS expects companies to provide meaningful disclosures of the reasons for removing the auditors.

IiAS will recommend voting on a case-to-case basis for such proposals based on the disclosures and the context of the removal.

Ratification of Remuneration to Cost Auditor
Under Section 148(3) of the Act, read with Rule 14 of the Companies (Audit and Auditors) Rules, 2014, remuneration of cost auditors must be approved by shareholders via an ordinary resolution. In IiAS’ observation, remuneration to cost auditors is usually commensurate with the size and complexity of the business. Therefore, IiAS generally recommends voting FOR such resolutions.




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3. DIVIDEND DECLARATION
GOVERNANCE FOCUS


High
Medium
Low
PERIODICITY
Once a year (other than interim dividends)
TYPE OF MEETING
AGM
COMPANIES ACT 2013
Section 123
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Ordinary
VOTES REQUIRED
More than 50%
KEY RISKS
For low dividend
1. High cash balance
2. Low pay-out ratios compared to     peers
For high dividend
1. Inadequate profits
2. Large contingent liabilities
SUMMARY NOTES
IiAS does not favour cash hoarding and encourages companies to articulate a dividend policy.
RELATED RESEARCH
IiAS research and commentary can be viewed on its website

IiAS will generally recommend voting FOR the proposed dividend pay-out (whether on equity or preference shares).

To help investors get a clearer picture on their returns, SEBI plans to encourage listed companies to put in place their own dividend distribution policies. The SEBI Board has identified dividend distribution policy as a focus area in the 2016-17 period. SEBI is looking to ensure that listed firms can state circumstances under which investors can or cannot expect dividend payouts.

The Ministry of Finance requires profit-making Public Sector Enterprises (PSEs) to pay a minimum dividend of 20% of equity or 20% of profit after tax, whichever is higher. Companies in the oil, petroleum, chemical, and other infrastructure sectors are required to pay at least 30% of profit after tax as dividend.

IiAS may advise shareholders to demand a higher dividend if:

  • Growth in dividend is not commensurate with the improvement in financial position; or
  • Growth in dividend is not commensurate with growth in royalty payments and/or managerial compensation; or
  • The dividend pay-out is consistently lower than industry average; or
  • The company has a large cash balance and has not communicated its use of cash reserves to shareholders.

IiAS may in rare instances, caution investors and recommend voting AGAINST a high dividend pay-out which may impact the long term interests of shareholders. IiAS will take into account if:

  • The company’s profitability is poor and consistently pays dividend out of reserves; or
  • The company has defaulted on any of its loan obligations; or
  • The company has large contingent liabilities; or
  • Operating cash flows are weak; or
  • The company is raising funds frequently from the debt/capital markets; or
  • If Capital Adequacy for banks or financial institutions is being threatened

IiAS has been advocating the converse of a dividend policy i.e. the ‘retention approval.’ We strongly believe that companies should obtain shareholder approval to retain cash specifying the rationale for doing so, and pay out the remaining to shareholders as dividends: this cash belongs to all shareholders and is not for managements to keep.

Best Practices
Markets need to change the conversation around dividends. Instead of dividend rate (dividend as a percent of face value), the focus must be on dividend payout ratio – how much of the profits generated for the year are distributed to shareholders. This will push boards to discuss retention policies and balance the need to hold cash vis-à-vis distribute it to shareholders.




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4. (RE) APPOINTMENT OF INDEPENDENT DIRECTORS
GOVERNANCE FOCUS

High
Medium
Low
PERIODICITY
Once, when (re)appointed.
Subsequent approvals taken after the expiry of term.
TYPE OF MEETING
AGM, EGM, PB,NCLT
COMPANIES ACT 2013
Section 149(4): Board Mix
Section 149(6): Eligibility
Section 165: Number of boards
SEBI (LODR) REGULATIONS,
2015
Chapter IV, Regulations 17(1) and 25
RESOLUTION TYPE
Ordinary: Appointment
Special: Reappointment
VOTES REQUIRED
More than 50%
75% (for reappointment)
KEY RISKS
1. Prolonged association with     promoters
2. Poor attendance levels
SUMMARY NOTES
IiAS expects independent directors to abide by the spirit of the regulations, not merely the letter.
RELATED RESEARCH
IiAS research and commentary can be viewed on its website iias.in. The list of articles relating to the resolution are:

Serving as a director or executive of a corporation obligates an individual to further the interests of that corporation and to exercise a fiduciary duty of ‘care’.

As per the Act, an independent director is permitted to be appointed for two consecutive terms of up to five years each. A mandatory cooling-off period of three years is necessary after ceasing as an independent director prior to any further (re)appointment. The provisions of the Act are applicable prospectively.

Best practice: In order to provide minority shareholders with a greater say in electing their representative directors on the board, countries such as the United States, Italy, Russia, and China have started following the cumulative voting process. Cumulative voting allows shareholders to cast all of their votes for a single nominee when the company has multiple openings on its board. This way, they can get their preferred candidates elected even if they only make up a small share of the population. Section 163 of the Act allows Indian companies to adopt cumulative voting, but it is a non-mandatory provision.

Given their role of enhancing and protecting the interests of public shareholders, IiAS has adopted a two-tiered evaluation framework for recommendations on the (re)appointment of independent directors:

1. Eligibility

IiAS has observed that some directors are independent as per law, but not in spirit. Their proximity to the promoter/management may impede their ability to provide an independent perspective. Accordingly, IiAS will not treat the following directors as independent:

  • Those who do not satisfy the eligibility criteria laid down in Section 149(6) of the Act and Regulation (16)(1)(b) of the SEBI (LODR) Regulations, 2015.
  • Directors who have been on the board for more than 10 consecutive years. IiAS makes two important distinctions here:
    • Unlike the Act, which computes tenure beginning 1 April 2014, IiAS will compute tenure on a retrospective basis.
    • IiAS will apply the ‘visa rule’ and classify directors, whose reappointment is within six months of completing 10 years on the board, as non-independent.
  • Directors who have been on the board of the parent/holding company for more than 10 consecutive years.
  • Directors who are simultaneously on the board of a large number of group companies, with a prolonged tenure of >10 years in any of these companies.
  • Representatives of large shareholders (holding >2% stake) or lenders, even if they are not appointed on the board as a nominee. However, former employees of such shareholders may continue to remain on the Board even after they move on from their employment may be considered independent. Similarly, directors who were earlier on the board as nominees may be considered independent once the investor has sold its stake.

2. Attendance
IiAS believes that the attendance level of independent directors in board/committee/shareholder meetings is a critical indicator of the directors’ commitment levels towards the company. IiAS recommends a minimum attendance level of 75% in a year. In case the attendance is below this threshold in the just concluded year, IiAS reviews the attendance over the immediately preceding three-year period (participation through alternate directors and audio/video means is counted while looking at overall attendance).

In addition, IiAS believes that the entire board should be present during all general meetings so that shareholders have the opportunity to interact with them.

To summarize:
IiAS will recommend voting FOR the (re)appointment of independent directors UNLESS:

  • Eligibility criteria on independence is not satisfied; or
  • Aggregate tenure on the board has exceeded 10 years; or
  • The director has attended less than 75% of the board meetings (on average) in the preceding three years; or
  • Number of Directorships exceeds the prescribed limit under regulations; or
  • The director carries a reputation risk; or
  • Lack of adequate experience; or
  • The director is a wilful defaulter or is the promoter of a company that is declared as a wilful defaulter.

IiAS criteria is more stringent than the regulatory requirements in certain aspects: these are captured in the table below.

Table 2: Variation between IiAS policy vis-à-vis regulations

Parameter/Criteria IiAS Regulations
Retrospective computation of tenure
Apply ‘visa rule’ for directors whose reappointment is within six months of completing 10 years on the board
Directors who are simultaneously on the board of a large number/percentage of ‘group’ companies cannot be considered independent
Employees/representatives of large shareholders (holding >2% stake)
Minimum average attendance level of 75% in the last three years




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5. APPOINTMENT OF NON-EXECUTIVE NON INDEPENDENT DIRECTORS
GOVERNANCE FOCUS

High
Medium
Low
PERIODICITY
Once, when (re)appointed.
Subsequent approvals taken after the expiry of term or by rotation (whichever is earlier).
TYPE OF MEETING
AGM, EGM,NCLT
COMPANIES ACT 2013
Section 152
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Ordinary
VOTES REQUIRED
More than 50%
KEY RISKS
Inexperienced family members appointed on the board largely to comply with the board diversity criteria.
Appointment/ Reappointment of a director not retiring by rotation
SUMMARY NOTES
IiAS will generally vote FOR the appointment of non-executive directors

Non-executive directors do not occupy any full-time position in the company. However, they have an association with the company which makes them ineligible to be treated as independent. In general, they can be grouped under the following buckets:

  • Promoter/Promoter Group/Relative
  • Former senior executives, with less than three years cooling-off period
  • Person with significant association that include those who:
  • - Provide professional services to the company, or to an affiliate
    - Are counterparties (customer, supplier, creditor, banker, advisor or consultant) in material transactions – both      commercial and non-commercial
    - Have a substantial stake in the company
  • Nominee directors

Best practice:
The board of a public listed company acts as the primary interface between the company’s management and its shareholders. In order to uphold the principles of corporate democracy, the board members often need to balance the dual responsibilities of monitoring the company’s actions as well as providing strategic guidance for its future growth and expansion. In order to mitigate any potential conflict of interest between the two roles, IiAS recommends that companies separate the roles of the CEO and Chairperson of the board. SEBI (LODR) REGULATIONS, 2015, mentions this as a non-mandatory requirement.

To provide shareholders a better understanding of the Board, companies must provide information on the skill sets of individual members and the value they bring to the Board.

IiAS uses attendance of board meetings as a proxy measure of a director’s engagement with company – we usually vote FOR the reappointments of directors that have attended at least 75% of the board meetings over a three-year period. However, in cases where promoters or their representatives are actively engaged with the business, but may not necessarily hold executive positions, IiAS may consider making an exception, and continue to vote FOR their reappointments, even if the attendance levels are below the 75% threshold.

IiAS may recommend voting AGAINST the appointment of members of the promoter family on the board if they do not possess the requisite experience, qualification or credentials for the assigned role. IiAS may also recommend voting AGAINST if the resolution proposes to:

  • appoint a non-executive director not eligible to retire by rotation; or
  • a director is a wilful defaulter or a promoter of a company that is a wilful defaulter; or a director carries a reputation risk.

Best practices
IiAS expects companies to provide adequate details on the board evaluation conducted by the companies in their annual report. Regulators in India have aligned the requirements for disclosures on board evaluation with those of other countries. But our analysis of 75 listed firms reveal that most companies are yet to embrace the spirit of the law – the annual reports contain limited disclosures, which fall well short of global practices. The lack of transparency is discomfiting for stakeholders, who want assurances that boards are performing their duties diligently by providing vigilant and objective oversight. In order to have a meaningful conversation with the markets, Indian companies and their boards must start accepting the need to be held accountable and commit to an insightful and transparent evaluation framework.

IiAS expects companies to disclose the following:

1. Mode of evaluation
2. Who is evaluated
3. Parameters used to evaluate directors, committees and the board
4. Process of evaluation
5. Actions taken by the companies based on the board evaluation results

1 Including NIFTY 50 and a set of 25 other companies chosen from a cross-section of smaller indices. Refer Annexure A.




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6. APPROVE NOT FILLING CASUAL VACANCY IN BOARDS
GOVERNANCE FOCUS


High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Sections 152(6),152(7) and 161(4)
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Ordinary
VOTES REQUIRED
More than 50%
KEY RISKS
Board composition norms not satisfied due to the vacancy.
SUMMARY NOTES
IiAS will generally vote FOR, as long as the board composition requirements are complied with.

This resolution usually comes up when a vacancy is created on the board due to the retirement/demise of a director, and the company proposes not to fill up the vacancy.

A board must have an adequate number of independent directors. One-third of the board must comprise of independent directors if the Chairperson is independent. If the Chairperson is part of the promoter group, half of the directors must be independent.

As long as the company remains compliant with the board composition norms, IiAS will recommend voting FOR not filling the vacancy caused due to retirement of a director.

When assessing board quality and composition for this resolution, IiAS will evaluate the independence of directors along the lines of its stated criteria (See (Re)Appointment of Independent Directors)




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7. REMOVAL OF DIRECTOR
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Section 169
SEBI (LODR) REGULATIONS,
2015
Chapter IV, Regulation 25(6)
RESOLUTION TYPE
Ordinary
VOTES REQUIRED
More than 50%
KEY RISKS
Directors who raise dissenting voices against management may be removed.
SUMMARY NOTES
Need to engage with company to understand the reasons for the removal.

Section 169 of the Act states that a company may remove a director, before the expiry of his/her tenure provided he/she is given an opportunity of being heard.

SEBI LODR Regulations 2015 states that an independent director who resigns or is removed from the board of directors should be replaced by a new independent director at the earliest (only if the company is not compliant with the board composition norm), but not later than the immediate next board meeting or three months from the date of such vacancy, whichever is later.

IiAS expects companies to provide investors will the rationale for the removal. IiAS will recommend voting FOR the removal on a case-to-case basis, subject to adequate disclosures made by the company in this regard.




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8. CHANGE IN BOARD SIZE
GOVERNANCE FOCUS

High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Section 149
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Ordinary/Special
VOTES REQUIRED
More than 50%
75% (to increase board size beyond 15 members)
KEY RISKS
Board size may be increased to accommodate family members.
SUMMARY NOTES
A large board size will make consensus building difficult

Section 149 of the Act states that the board of every public company must comprise of at least three and at maximum 15 directors. However, a company may appoint more than 15 directors after passing a special resolution.

IiAS believes that, given the nature and quantum of work involved, the board of listed companies should comprise of atleast five directors. On the other hand, consensus on many critical issues may be difficult to achieve if board size exceeds 15 members.

IiAS will, therefore, generally recommend voting AGAINST resolutions regarding increase in board size to over 15 members particularly if there are a large number of promoter family members on the board.




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9. REMUNERATION OF EXECUTIVE DIRECTORS
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
On appointment / reappointment
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Section 196: Appointment
Section 197: Remuneration
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Ordinary (Proposed to be changed to special resolution under the Companies (Amendment) Bill, 2016)
VOTES REQUIRED
More than 50%
KEY RISKS
1. Higher pay than peers
2. Open-ended pay structure
3. Pay not linked to performance
SUMMARY NOTES
IiAS encourages a high component of variable pay and a cap on the overall salary.
RELATED RESEARCH
IiAS research and commentary can be viewed on its website iias.in. The list of articles relating to the resolution are:

The level and composition of executive remuneration should be appropriately structured in order to attract and incentivize the top management. At the same time, measures need to be taken to ensure that there is a fair and equitable distribution of the wealth of the company. Unless the right balance is achieved, the company may either end up aggrieving its shareholders or run the risk of losing good talent.

IiAS expects companies to align the remuneration levels with the financial performance of the company. IiAS will use the following indicators to assess the appropriateness of remuneration:

  • Turnover and profitability
  • Market capitalisation and price performance
  • ‘Best Fit’ remuneration (based on IiAS’ proprietary tool,“comPAYre”)

IiAS will generally vote FOR proposals in which the remuneration level is the same as the previous term. When companies propose an increase in remuneration, IiAS will generally recommend voting FOR, UNLESS:

  • The disclosure levels are inadequate; or
  • The proposed salary structure is open-ended; or
  • The remuneration level is substantially higher than industry/market peers. (Industry peers are defined as companies of similar size and scale, either in the same industry or across other industries.); or
  • The remuneration is not commensurate with the financial performance of the company.

IiAS recognizes that remuneration for professional directors is vetted and approved by the promoter(s). Because of this principal-agent relationship, IiAS generally makes a distinction in its voting recommendations on remuneration for promoter’s vis-à-vis professional executives.

Remuneration for promoter directors
In case the proposed remuneration is paid to a relative of a director/promoter, the pay should be commensurate with his/her qualification and experience in the assigned role.

In case there are two or more promoter directors on the board, IiAS may take into consideration the aggregate remuneration drawn by them in previous years while making its voting recommendation.

Remuneration from two companies
It is sometimes observed that executives are appointed in a full-time role in two or more group companies. While this is permissible under the law, IiAS does not encourage this practice. IiAS will recommend voting FOR such proposals only if the appointment is in an unlisted subsidiary, there are strong business linkages (integrated businesses or supply chains), and the total remuneration (across all sources) is in line with IiAS policy.

Remuneration from external arrangements
An executive director may receive remuneration from external arrangements including from private equity investors. Such arrangements do not result in distribution of company’s profit, but are likely to create a conflict of interest. Non-disclosure of such arrangements raises transparency issues in the overall remuneration structure. IiAS expects companies to disclosure such arrangements to its shareholders.

Disclosure Requirements
Both the Act and SEBI’s (LODR) Regulations, 2015 have recently strengthened the disclosure requirements for executive compensation. Companies are now required to provide granular details of all remuneration components including stock options, retirement benefits and other perquisites and allowances. IiAS expects that the granularity of the new disclosure requirements will compel companies to be more considered in their remuneration policies and practices. It will place greater accountability on executive directors and provide better insights to shareholders on executive remuneration.

Companies Act 2013 SEBI (LODR) REGULATIONS, 2015
  • Ratio of remuneration of each director to median remuneration of all employees
  • % increase in remuneration of each director and CEO
  • % increase in median remuneration
  • No of permanent employees
  • Relationship between increase in average salary and company performance
  • Remuneration of key managerial personnel vis-à-vis company performance
  • Key parameters for any variable component of remuneration
  • Ratio of the remuneration of the highest paid director to employees who are higher paid than the concerned director
  • Affirmation that the remuneration is as per the remuneration policy of company
In addition, companies will have to provide details of employees who are paid over Rs.6 mn annually, or are paid higher than any of the whole-time directors.
In addition to what is already specified under the Companies Act, 2013,the following disclosures are to be provided in the Annual Report:
  • All components of individual director’s remuneration summarized under major groups, such as salary, benefits, bonuses, stock options, pension etc.
  • Details of fixed component and performance linked incentives, along with the performance criteria.
  • Service contracts, notice period, severance fees.
  • Details of stock option, including grant period, vesting period and if these have been issued at a discount.

Recommended Best Practices
Beyond disclosures, IiAS recommends companies to ensure that there is a high component of variable pay in the overall salary, which will link performance and pay. The structure of such incentives must be aligned with those of comparable peers and capped at a level that is commensurate with the size, performance and complexity of the business.


Fixed Pay Variable Pay
Basic Perquisites & allowances Short Term Incentives Long-Term Incentives
  • Must be capped
  • Range must be narrow
  • Annual increments must be specified
  • Must be quantified and capped at an absolute amount
  • Commission must be linked to performance benchmarks
  • All benchmarks must be communicated to shareholders before seeking their approval
  • There must be an upper cap on the maximum commission that can be received
  • There must be an upper cap on the amount of stock options that will be granted
  • Managements must clearly articulate their rationale for stock options, if these are granted at a discount to market price



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10. PAY IN CASE OF INADEQUATE PROFITS
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Section 197: Remuneration
Schedule V: Pay in case of inadequate profits
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
Inequitable treatment for management viz. minority shareholders.
SUMMARY NOTES
IiAS takes a strong stance against excessive CEO remuneration in poorly performing companies

Section 197 of the Act states that the remuneration payable to any one whole-time director must not exceed 5% of the net profits of the company. If there is more than one such director, the aggregate remuneration must not exceed 10% of the net profits.

Profits are considered inadequate if the remuneration exceeds the above thresholds. In such companies, the executive directors can be paid upto a maximum of (A) and (B) given below by passing an ordinary resolution:

(A)
Where the effective capital is Annual remuneration payable shall not exceed
Negative or less than Rs.5 crore Rs.30 lakh
Rs.5 crore and above but less than Rs.100 crore Rs.42 lakh
Rs.100 crore and above but less than Rs.250 crore Rs.60 lakh
Rs.250 crore and above Rs.60 lakh + 0.01% of (effective capital excess of Rs.250 crore)

Effective capital = the aggregate of the paid up share capital (excluding share application money or advance against shares), Securities Premium Account, Reserves & Surplus (Excluding Revaluation Reserve), Long Term Loans (which are repayable after one year) (excluding working capital loans, Overdrafts, interest due on loans unless funded, bank guarantee, etc., and other short term arrangements), Deposits (Fixed deposits & Inter Corporate Deposits) reduced by the aggregate of Investments (except in case of Investment Company whose principle business is acquisition of shares, stock debentures or other securities), Accumulated Losses and Preliminary Expenses not Written off.

(B)
2.5% of the current relevant profit – only for executive directors who do not hold shares of nominal value of Rs.5 lakh or more and are not related to any director or promoter at any time during the two years prior to their appointment.

These limits can be doubled if the resolution is passed by the shareholders as a SPECIAL RESOLUTION.

The Companies Act 2013 considers profitability on a standalone basis, however IiAS takes into account consolidated profits, taking into account the role and responsibility of the executive.

IiAS will have a three-year lookback on company performance and profitability before recommending voting FOR minimum remuneration on a case to case basis and / or believe that the executive will play an important role to help turn around the company.

On the balance, the minimum remuneration must be in line with industry peers and must not be higher than the remuneration paid during years in which the company made adequate profits.

IiAS generally makes a distinction in its voting recommendations on remuneration for promoters vis-à-vis professional executives.




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11. REMUNERATION OF NON-EXECUTIVE DIRECTORS
GOVERNANCE FOCUS

High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Section 197
SEBI (LODR) REGULATIONS,
2015
Chapter IV, Regulation 17(6)
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
Remuneration not commensurate with size of company.
SUMMARY NOTES
Past history of board compensation is a deciding parameter.

Shareholders’ approval is not required for the payment of sitting fees to non-executive directors. Non-executive directors cannot be paid remuneration (excludes sitting fees and reimbursements) higher than 1% of the net profits of the company (if there is a managing or whole-time director or manager) and 3% otherwise. These limits are permitted to be extended (subject to the overall limit of 11%), on obtaining approval of the shareholders in a general meeting. In addition, independent directors are not entitled to any form of stock options from the company.

Best practice
While the Companies Act 2013 limits the remuneration to Non-Executive Directors at 1% of the net profits, we have observed that Companies generally pay much lower. IiAS recommends that Companies place a cap on the amount proposed to be paid.

While recommending on such resolutions, IiAS will consider the following:

  • Whether an overall cap has been specified
  • Remuneration paid to non-executive directors in past years
  • Whether the proposed remuneration is commensurate with the size and scale of the company
  • Financial performance in the last few years



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12. ALTERATION TO CHARTER DOCUMENTS
GOVERNANCE FOCUS

High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Section 13: Change in MoA
Section 14: Change in AoA
Section 61: Change in capital
SEBI (LODR) REGULATIONS,
2015
Regulation 45: Name change
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
SUMMARY NOTES
IiAS will recommend voting FOR, if the impact is neutral to the interest of minority shareholders

A. Alteration to Memorandum of Association (MoA)
The MoA of a company states the:

  • Name of company
    IiAS will generally recommend voting FOR any change/alteration in the name of the company.

  • State in which the registered office is to be situated
    IiAS will generally recommend voting FOR the change in state in which the registered office is to be situated.

To facilitate shareholder engagement with company management, IiAS encourages companies to be more accessible to its shareholders and other stakeholders. It is commonly observed that general meetings are often held in/near the registered office of the company. Companies, therefore, must take every effort to ensure that the registered office is situated within the local limits of the nearest city or town. IiAS may recommend voting AGAINST proposals to shift the registered office if there is reason to believe that the shifting will cause significant inconvenience to shareholders.

Best Practice
IiAS believes all company documents must be made available to shareholders through the company website.

Companies must also clearly articulate and list incremental changes proposed

  • The Objects for which the company is incorporated.
    IiAS recommendations on changes to the objects clauses in the memorandum will depend on a case-to-case basis, depending on the nature and impact of such changes on minority shareholders.

    The proposed Companies (Amendment) Bill 2016 makes a provision for Companies to adopt an unrestricted objects clause. IiAS will recommend voting FOR such proposals.

  • Liability of members– whether limited or unlimited.
    IiAS does not foresee the applicability of this provision for listed companies.

  • Capital of the company, stating the number of shares.
    IiAS will generally recommend voting FOR resolutions proposing to increase/decrease the authorized share capital, provided the change affects all shareholders equally.

B. Alteration to Articles of Association (AoA)
The Articles of Association (AoA) of a company contains regulations for management of the company, including grant of special rights to certain classes of investors.

IiAS recommendations on changes to clauses in the articles will depend on a case-to-case basis.

IiAS may recommend voting AGAINST proposals where the company may grant special rights to certain shareholders through the AoA, if detrimental to other shareholders.

IiAS will recommend voting FOR proposals in which the AoA is changed to align with the Companies Act 2013 and the revised Articles of Association are easily made available to the shareholders for perusal.




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13. ISSUANCE OF EQUITY SHARES
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Section 48: Variation of rights (to be notified)
Section 62: Issue of capital
Section 63: Bonus Issues
SEBI (LODR) REGULATIONS,
2015
Chapter IV, Regulations 28 and 29
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
1. Voting power of existing     shareholders may get diluted.
2. Promoter shareholding may     increase significantly
SUMMARY NOTES
IiAS does not favour preferential issues, but may recommend voting FOR if the company has disclosed reasons for fund raising.
RELATED RESEARCH
IiAS research and commentary can be viewed on its website iias.in. The list of articles relating to the resolution are:

As per the Act, issuance of shares on a pro-rata basis to existing shareholders (rights issue) will not require shareholder approval. However, if the issuance is to any other entity, it requires approval through a special resolution. This includes both public issues (IPO/FPO) and preferential allotments. Such approvals are valid for a period of one year.

Public Issues
Public issues are monitored by SEBI as per the SEBI (ICDR) Regulations. IiAS will generally recommend voting FOR public issues.

Preferential Issue of Shares
Preferential issues are made to a select few investors – existing or new. Since the majority of existing shareholders are denied participation rights, their stake is usually diluted. Therefore, IiAS does not favour preferential issues, especially if it is made to the promoters.

As per regulations, the following people are not eligible to participate in preferential issues:
  • Person who has sold equity shares of the company in the preceding six months
  • Promoters who had previous subscribed to warrants, but failed to exercise will not be eligible to participate for a period of one year from the date of expiry/cancellation of the warrants
These shares generally have a lock-in period of three years from the date of allotment.

However, IiAS recognizes that a public issue is typically costlier and time consuming. IiAS also recognizes that shareholders who do not wish to get diluted, have the opportunity to buy shares from the secondary market.

IiAS will therefore recommend voting on such issues on a case-to-case basis. Our analysis will take into account the following:
  • List of allottee: promoter/non-promoter
  • Type of investor: financial/strategic
  • Extent of dilution
  • Urgency of funds
  • Debt levels and available cash
  • Return on capital employed

IiAS will generally recommend voting FOR cases where the issuance is made pursuant to a CDR/SDR/restructuring scheme and in banks, where further funds are required to augment its capital base. Public sector banks need additional capital/to be recapitalized for Basel III, write-off of NPL’s and to grow. Additional capital for banks implies the banks and the economy will grow. IiAS sees this as a systemic issue, and may recommend voting FOR the resolutions.

IiAS may recommend voting AGAINST cases where the dilution for minority shareholders is greater than 20%, if the company has not adequately disclosed use of proceeds.

Preferential Issue of Warrants
In a warrants issue, 25% of the conversion price is paid up front, with an option to convert the warrants into equity shares anytime during the next 18 months. The balance 75% is paid upon conversion. If the warrants are allowed to lapse, the initial up front amount of 25% is forfeited by option holders.

When the promoters let the warrants lapse, it affects the company’s liquidity position as 75% of the funds earmarked for capex and other capital requirements are forfeited. In addition, it gives promoters the option to ride the share price for 18 months.

IiAS generally recommends voting AGAINST preferential issue of warrants. IiAS may recommend voting FOR issues:
  • Made to a government controlled entity (in case of PSUs)
  • Made to technical collaborators, wherein the preferential allotment may be required to bring in technical expertise
  • In which the exercise period is less than 18 months
  • In which the upfront payment is greater than 25%
  • If the company’s financial health is deteriorating and there is a need for urgent fund infusion

Issue of Convertible Securities
Convertible securities are instruments which are convertible into equity shares of the company on a future date, at a predetermined price. They are mostly debt instruments which have lower interest rates and flexible repayment covenants due to the embedded equity element.

IiAS will generally recommend voting FOR such issuances after analysing the following:
  • Financial performance
  • Leverage ratios and credit rating
  • Effective interest rates
  • Debt servicing capacity and past repayment history
  • Amount of cash balance and marketable securities
  • Post-conversion dilution

Variation of Voting Rights
As per Section 48 of the Act, the voting rights attached to any class of shares may be varied with the consent of three-fourths of holders of the shares of that class or by passing a special resolution at a separate meeting of the holders of the shares of that class.

IiAS will recommend voting on a case-to-case basis on such proposals.

Issue of Bonus Shares
A company may issue fully paid-up bonus shares to its shareholders out of its free reserves, securities premium account, or the capital redemption reserve. Bonus shares do not change the fundamentals of the company.

IiAS will generally recommend voting FOR the issuance of bonus shares.




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14. ISSUANCE OF NON-CONVERTIBLE SECURITIES
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Sections 42 and 62 and 71
SEBI (LODR) REGULATIONS,
2015
Chapter V, where the Company has listed Non-Convertible Securities Regulations 49 - 62
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
Issuance to related parties may be at non-favourable terms for minority shareholders.
SUMMARY NOTES
Since the issue will be within the overall borrowing limit, IiAS generally recommends voting FOR such proposals.

Non-convertible securities are generally debt instruments (debentures) which the company uses to augment its capital base. As per Section 42 of the Act, a company requires shareholder approval through a special resolution if such securities are offered on a private placement basis.

IiAS will generally recommend voting FOR such proposals as the issuance of non-convertible debentures is usually within the overall borrowing limit of the company.

Refer Policy No 22 on borrowing resolutions.



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15. ISSUANCE OF PREFERENCE SHARES
GOVERNANCE FOCUS


High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,NCLT
COMPANIES ACT 2013
Sections 42, 55 and 62
SEBI (LODR) REGULATIONS,
2015
Chapter V and VI, Regulations 49 - 63
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
Inability of the company to pay timely dividends.
SUMMARY NOTES
Preference shareholders get voting rights if dividends are not paid for a period of two years.

Generally, preference shareholders do not have any voting powers. They can only vote on resolutions which directly affect the rights attached to the preference shares and, any resolution for the winding up of the company or for the repayment or reduction of the share capital of the company.

However, in cases where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders gets a right to vote on all resolutions placed before the company. This will lead to a dilution in voting power of the equity shareholders.

Best practice
IiAS expects ‘promoters’ to forego their voting rights even if they do not receive dividends on their preference shares for two or more years.

Where the preference shares are redeemable, IiAS will consider these as debt and apply the same policy as for Borrowing Resolutions.

IiAS will generally recommend voting FOR issuance of preference shares in profit making companies with a dividend track-record.




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16. ISSUANCE OF STOCK OPTIONS (ESOPs)
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Sections 42 and 62
SEBI (LODR) REGULATIONS, 2015
-
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
Dilution for shareholders
Cost of the scheme
SUMMARY NOTES
IiAS will generally recommend voting FOR grant of ESOPs, subject to adequate disclosures, cap on dilution and minimal impact on the net profits

All employee stock option plans (ESOPs) have to be approved by shareholders by passing a special resolution. As per the Act, the following disclosures need to be made in the notice to shareholders:

  • the total number of options to be granted.
  • classes of employees entitled to participate in the ESOS
  • period of vesting
  • exercise price or pricing formula
  • exercise period and process of exercise
  • the appraisal process for determining the eligibility of employees
  • maximum number of options per employee and in aggregate
  • the valuation method: fair value or intrinsic value
  • Impact on financial statement (expenses for a year and provision for liabilities)

IiAS will recommend voting on stock options on a case-to-case basis, depending on the following:

  • Dilution: The conversion of ESOPs into equity shares will raise the issued capital of the company, which may dilute the interests of minority shareholders. IiAS expects the dilution (over a 5-year period) to be restricted to less than 5%.

  • Exercise price: Where Companies have issued options at a discount, the difference between the market price and the issue price will be borne by the company as an expense, under the intrinsic value method. From FY2016-17, India Inc. will migrate to International Financial Reporting Standards (IFRS). Unlike under the intrinsic value - under IFRS, company that has gran ted options at market price will report cost and provide liabilities on the stock options issued at market price. IiAS will be generally FOR such resolutions after considering adequate disclosures.

    IiAS believes that the issue of stock options at market price (on the grant date) is a good governance practice.

  • Vesting Period: IiAS expects vesting periods to be between one to five years. For senior executives, IiAS expects the company to specify a vesting period of at least three years.




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17. MODIFICATION OF STOCK OPTION SCHEMES
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,PB,NCLT
COMPANIES ACT 2013
Section 62 and
Companies (Share capital and Debentures) Rules, 2014
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
Employees benefitting at the cost of shareholders.
SUMMARY NOTES
IiAS is generally not in favour of re-pricing stock options.

IiAS policy on modification of exercise price
IiAS views ESOP schemes as incentive measures to ensure the active participation of company employees in the growth of the company. However, the incentive should be withdrawn if the company is not able to grow at its anticipated pace.

IiAS is not in favour of re-pricing stock options and will generally recommend voting AGAINST such resolutions UNLESS:
  • Executive directors and senior management are excluded from the new re-priced scheme
  • The reasons for the poor performance were beyond the control of the company
  • Re-pricing is necessitated due to corporate actions
  • The re-priced options follow a life-cycle similar to that of new stock options; i.e they have a specified vesting, grant and exercise schedule

IiAS policy on modification of vesting period/exercise period
The stock options issued at market price may be repriced if the exercise period of these stock options is increased. IiAS will take a case to case view on the revision in exercise period and expects the companies to provide a detailed rationale for revision in exercise period.

IiAS will recommend voting FOR if the proposed modification if essential for regulatory compliance and other exceptional circumstances.




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18. INTER-CORPORATE TRANSACTIONS
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM, PB,NCLT
COMPANIES ACT 2013
Section 186
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
Inter-corporate transactions with weak entities may be written-off, causing financial strain on the company
SUMMARY NOTES
IiAS will consider the ability of the company to absorb losses/write-offs, if any, resulting from the transactions

Inter-corporate2 transactions can be clubbed into the following buckets:

  • loan to any person or other body corporate,
  • guarantee/security in connection with a loan to any other body corporate or person, and
  • subscription/purchase of securities of any other body corporate

As per Section 186 of the Act, companies are permitted to undertake inter-corporate transactions up to the higher of:

(a) 60% of (paid-up capital + free reserves + securities premium), or
(b) 100% of free reserves and securities premium account.

Inter-corporate transactions beyond the above limits require shareholder approval via a special resolution. Transactions with wholly-owned subsidiaries and joint ventures are exempted from this requirement.

IiAS voting recommendations on such cases are based on the following:
  • Disclosure levels: mostly about the recipient parties
  • Financial health of the company extending loans
  • Financial health of the recipient parties, including cases where it is a part of an approved rehabilitation proposal
  • Source of funds for the transactions
  • Aggregate amount of transaction
  • Urgency and need for such transactions

IiAS expects companies will pro-rate the transaction amount to the extent of its ownership in the entity.

2Inter-corporate transactions covers body corporates as well as individual persons.



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19. RELATED PARTY TRANSACTIONS (RPT)
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM, PB,NCLT
COMPANIES ACT 2013
Section 188
SEBI (LODR) REGULATIONS,
2015
Chapter IV, Regulation23
RESOLUTION TYPE
Ordinary
VOTES REQUIRED
More than 50% of shareholders who are not related parties
KEY RISKS
The terms of the arrangement may be skewed in favour of related parties.
SUMMARY NOTES
IiAS will stress on equitable treatment for all shareholders.
RELATED RESEARCH
IiAS research and commentary can be viewed on its website iias.in. The list of articles relating to the resolution are:

All material RPTs (typically exceeding 10% of the annual consolidated turnover of the company) are required to be approved by shareholders through an ordinary resolution. Interested/related parties must abstain from voting on such resolutions. The Companies Act 2013 specifies different materiality thresholds depending on the nature of the transaction.

Transactions between Government owned entities are excluded from the purview of Section 188 of the Act.

Best practice
Transactions undertaken by subsidiaries which are material in nature should be brought to shareholders for approval

Royalty arrangements should also be put up for shareholder approval.

IiAS will recommend voting on a case-to-case basis, depending on the following:

  • Parties to the transaction
  • Terms of the contract
  • Level/degree/nature of association with related parties
  • Rationale for transaction
  • Pricing and financial arrangements
  • Whether an independent opinion has been obtained on the valuation/pricing aspects
  • Economic benefit for all interested related parties

IiAS will generally recommend voting FOR transactions that are operational in nature.

IiAS will generally recommend voting AGAINST such resolutions, if the controlling shareholder benefits from the transaction at the expense of minority shareholders.




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20. CHARITABLE CONTRIBUTIONS AND DONATIONS
GOVERNANCE FOCUS

High
Medium
Low
PERIODICITY
When the quantum crosses the prescribed limits.
TYPE OF MEETING
AGM, EGM, PB,NCLT
COMPANIES ACT 2013
Section 181
SEBI (LODR) REGULATIONS,
2015
RESOLUTION TYPE
Ordinary
VOTES REQUIRED
More than 50%
KEY RISKS
Large donations being made to promoter controlled trusts.
SUMMARY NOTES
IiAS will generally vote AGAINST donations beyond the prescribed limits.
RELATED RESEARCH
IiAS research and commentary can be viewed on its website iias.in. The list of articles relating to the resolution are:

Section 181 of the Act allows companies to make charitable contributions upto 5% of the average net profits for the three immediately preceding financial years. Shareholder approval via an ordinary resolution is required for contributions to exceed the 5% threshold.

Unlike the longer-term benefits of corporate social responsibility (CSR) activities, charitable contributions have limited benefits and are not always aligned to a company’s business model. Therefore, IiAS will generally recommend voting AGAINST charitable donations beyond 5% of average net profits.

IiAS may make an exception to this policy if the profits had dipped during the year due to one-time expenses or other exceptional items. In such cases, IiAS expects the company to seek approval only for the specific year in which the profits had dipped.

IiAS expects companies to disclose the recipient charities/trusts and the level of association between the recipient charities and the company management/board (if any).




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21. SALE OF ASSETS
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
PB
COMPANIES ACT 2013
Section: 180(1)(a)
SEBI (LODR) REGULATIONS,
2015
Chapter IV, Regulation 24(5) and (6)
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
Improper valuation of critical assets.
SUMMARY NOTES
IiAS will generally recommend voting FOR if all shareholders are impacted equally.
RELATED RESEARCH
IiAS research and commentary can be viewed on its website iias.in. The list of articles relating to the resolution are:

For any sale of assets, IiAS expects the companies to make the following disclosures:

  • Rationale for the sale
  • Financials of the business being sold
  • Critical balance sheet and P&L ratios of the business being sold
  • Expected impact on sales/profits
  • Use of sale proceeds
  • Book value of aggregate assets to be disposed
  • Market value of aggregate assets to be disposed
  • Valuation report from an independent third-party
  • Expected price

As per section 180(1)(a) of the Act, a company cannot sell, lease, or dispose of any of its undertaking3, or substantially the whole of any undertaking, without getting prior approval from shareholders through a special resolution. As per Chapter IV, Regulation 24(5) of the LODR, a company cannot dispose of shares in its material subsidiary4 which would reduce its shareholding (either on its own or together with other subsidiaries) to less than 50% or cease the exercise of control over the subsidiary without passing a special resolution. Further, as per Regulation 24(6) selling, disposing and leasing of assets amounting to more than 20% of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution.

IiAS will generally recommend voting FOR the resolution if it believes that the transaction is not detrimental to the interests of the minority shareholders.

IiAS expects companies to disclose use of the sale proceeds to shareholders. If there is no immediate need for the cash, the amount must be distributed to shareholders through dividends.

3Undertaking refers to an asset of the company in which the investment of the company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year or that has generated 20% of the total income of the company during the previous financial year. “Substantially the whole” of any undertaking refers to 20% or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

4A material subsidiary is one where the investment of the company in the subsidiary exceeds 20% of its consolidated net worth as per the audited balance sheet of the previous financial year or if the subsidiary has generated 20% of the consolidated income of the company during the previous financial year.





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22. INCREASE IN BORROWING LIMITS
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM, PB,NCLT
COMPANIES ACT 2013
Section 180(1)(c)
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
1. Lack of clarity on usage of funds
2. Deterioration of leverage profile
SUMMARY NOTES
The track record of the company in raising and servicing debt is a key voting parameter
RELETED RESEARCH
IiAS research and commentary can be viewed on its website iias.in. The list of articles relating to the resolution are:

As per the Act, a company cannot borrow any sum which exceeds the aggregate of its paid-up share capital and free reserves without getting prior approval from its shareholders through a special resolution. Temporary loans5 obtained from the company's bankers in the ordinary course of business are exempt from this section.

IiAS observes that borrowing resolutions, which are presented to shareholders for approval, are usually without any details explaining why the money is needed. While companies do need some flexibility to raise funds to manage their operations, some companies have leveraged the full scope of ambiguity by asking shareholders to approve borrowing limits that the company is unlikely to use even over the next decade. Others have asked for rolling limits - a finite amount of debt, over and above the net-worth. Therefore, as the company's net-worth increases, so does its borrowing limits.

As a good governance practice, IiAS expects:

  • Borrowings limits to be absolute limits (not rolling limits linked to net-worth), and must comprise both long-term and short-term limits (including credit limits). The company must also provide clarity on the quantum of borrowing limits that are likely to be non-fund based in nature.
  • Companies to present broad details of the plan and purpose of raising the debt.
  • Companies to disclose the quantum of consolidated and standalone gross debt and net debt outstanding as on the date of the notice and each quarter-end.


IiAS may recommend voting AGAINST an increase in the borrowing limits where:
  • Sufficient disclosures have not been provided on the need for further borrowing.
  • The company has borrowed excessively in the past and/or has a poor track record in fulfilling its debt obligations.
  • The company’s performance and leverage profile may get affected.
  • The borrowing limit, along with short term debt, if fully utilized, will lead to a debt-equity ratio of more than 2:1

5Temporary loans are loans repayable on demand or within six months from the date of the loan such as short term, cash credit arrangements, the discounting of bills and the issue of other short term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature.




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23. CREATION OF CHARGE
GOVERNANCE FOCUS


High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM, PB,NCLT
COMPANIES ACT 2013
Section 180 (1)(a)
SEBI (LODR) REGULATIONS,
2015
-
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
-
SUMMARY NOTES
IiAS will generally recommend voting FOR such resolutions

The Companies Act 2013 requires a company to get shareholder approval via a special resolution to sell, lease, or dispose of any of its undertaking6, or substantially the whole of any undertaking.

The mortgage or charge on all or any of the properties of a company for securing its borrowings is deemed as disposal of the whole or substantially the whole of the undertaking of the company.

Therefore, companies have been seeking fresh approval of the shareholders by way of special resolution for creation of charge on their assets to ratify security creation on funds already borrowed in the past or for securing their future borrowings.

IiAS generally recommends voting FOR all resolutions that pertain to creation of charge for securing sums already borrowed / to be borrowed by the company (even if IiAS has recommended voting AGAINST the borrowing resolution) as the terms of borrowing, interest rates etc. for secured loans tend to be better than those for unsecured loans.

6Undertaking refers to an asset of the company in which the investment of the company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year or that has generated 20% of the total income of the company during the previous financial year. “Substantially the whole” of any undertaking refers to 20% or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.




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24. RESCHEDULING OF IPO/FPO PROCEEDS
GOVERNANCE FOCUS

High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM,NCLT
COMPANIES ACT 2013
Section 27
SEBI (LODR) REGULATIONS,
2015
Chapter IV, Regulation 32
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
Significant change in the business model of the company
SUMMARY NOTES
The company must be able to clearly justify the change in usage strategy of such proceeds.

A company needs approval through a special resolution to change the objects for which money was raised. In addition, the company cannot use any amount raised through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company.

As per Section 27 of the Companies Act 2013, dissenting shareholders (shareholders who have not agreed to the proposal to vary the terms of contracts or objects) must be given an exit offer by promoters or controlling shareholders at an appropriate exit price (to be fixed after approval from SEBI).

IiAS’ recommendation will depend on whether the company has been able to clearly justify the change in usage strategy of such proceeds.




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25. BUYBACKS
GOVERNANCE FOCUS


High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
AGM, EGM, PB ,NCLT
COMPANIES ACT 2013
Section 68
SEBI (LODR) REGULATIONS,
2015
Chapter IV, Regulation 29(1)(b)
RESOLUTION TYPE
Special
VOTES REQUIRED
75%
KEY RISKS
The outflow on account of the buyback may impact the interest of stakeholders
SUMMARY NOTES
Since the decision to tender lies entirely with shareholders, IiAS will generally recommend voting FOR buy-backs.

Buyback of shares in India is governed by Section 68 of the Companies Act 2013, Regulation 29 of the SEBI (LODR) Regulations, 2015 and the SEBI (Buyback of Securities) Regulations, 1998.

As per these regulations, any company willing to buy back some of its shares from the market, needs to:

  • Disclose adequate reasons for the buy-back
  • Ensure that the buy-back amount is less than 25% or less of the aggregate of paid-up capital and free reserves of the company
  • Ensure that the aggregate debt after buy-back is not more than twice the sum of company’s paid-up capital and free reserves
  • Complete the process within a period of six months from the date of passing of the special resolution
  • Ensure that no offer of buy-is made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back
  • Ensure that atleast 50% of the amount earmarked for buy-back is utilized

IiAS recognizes that share buybacks provide an efficient exit mechanism for shareholders. Every shareholder has a choice: they can tender their shares through the buyback offer if they feel the price is right or they can continue to remain invested.

Since the decision will be made by shareholders depending on their risk-return appetite, IiAS will generally recommend voting FOR buyback proposals.

However, in rare instances, IiAS may caution investors and recommend voting AGAINST share buy-backs if it negatively impacts the long term interests of the company’s stakeholders.




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26. SCHEME OF ARRANGEMENT
GOVERNANCE FOCUS
High
Medium
Low
PERIODICITY
Need-based
TYPE OF MEETING
CCM, PB
COMPANIES ACT 2013
Section 230-234 (yet to be notified)
SEBI (LODR) REGULATIONS,
2015
Chapter IV, Regulations 11, 27 and 37
RESOLUTION TYPE
Ordinary - PB
Special - CCM
VOTES REQUIRED
50% of public shareholders - PB
75% - CCM
KEY RISKS
Inequitable treatment of minority shareholders
SUMMARY NOTES
IiAS will evaluate the long-term impact of such schemes before finalizing the recommendations.
Schemes of arrangement for a company refer to the following:
  • Reorganization of the company’s share capital,
  • Compromise between a company and its creditors or any class of them (e.g., corporate debt restructuring), or
  • Scheme for the reorganization of the company involving any merger or amalgamation.

Applications for such schemes of arrangement need to be submitted to the concerned court for approval. The court, at its discretion, may direct the company to convene a meeting of its shareholders and creditors and get their approval through a special resolution.

The schemes also need to be submitted to the stock exchanges and SEBI for approval. If the scheme involves entities of the promoter group or envisages issuing additional shares to the promoter group, the scheme needs to be approved by a majority of public/minority shareholders.

While proposing such schemes, companies need to disclose the following:

  • the proposed terms of the scheme
  • a report adopted by the directors of the merging companies explaining the effect of the arrangement on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders
  • the valuation report from an independent chartered accountant (in cases where there is a change in shareholding pattern)

The company's auditor needs to certify that the accounting treatment proposed in the scheme of arrangement is in conformity with the accounting standards prescribed under the law.

Since the underlying contours and rationale of each case vary, IiAS will recommend on a case-to-case basis for such schemes of arrangement. Our analysis will generally take into account the following:

  • Valuation
  • Mode of payment
  • Dilution of stake
  • Underlying rationale
  • Impact on financial and leverage ratios
  • Accounting treatment
  • Legal and tax implications
  • Impact on minority shareholders
  • Change in shareholding pattern



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ANNEXURE A: SAMPLE ACCOUNTS PAGE (MANUFACTURING AND SERVICES)
Category: Accounts

Resolution: Adoption of Financial Statements


IiAS believes that a comprehensive review of the financials of a company is a critical exercise which often requires first-hand information and proper due diligence. IiAS does not provide voting recommendations on resolutions for adoption of accounts, given the limited time between receipt of the annual report and the shareholder meeting, but provides analysis of critical ratios.


Note: The company’s outstanding debt as on 31 December 2015 was Rs 350.0 mn (including current maturities of long-term debt of Rs 111.5 mn). It has not paid any interest on loans during 2015. Total finance cost for 2015 was Rs. 924.7 mn, relatively high primarily on account of interest paid on income tax relating to earlier years.
* For interest/average debt: only interest paid on loans has been taken into consideration



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ANNEXURE B: SAMPLE ACCOUNTS PAGE (BANKING/FINANCIAL)
Category: Accounts

Resolution: Adoption of Accounts

IiAS believes that a comprehensive review of the financials of a company/bank is a critical exercise which often requires first-hand information and proper due diligence. IiAS does not provide voting recommendations on resolutions for adoption of accounts, given the limited time between receipt of the annual report and the shareholder meeting, but provides analysis of critical ratios.


The Bank has spent Rs 1.2 bn (as against Rs 1.4 bn as prescribed under Section 135 of the Companies Act 2013) on CSR activities for FY15. This amounts to 1.84% of the average net profit of the Bank for the last three financial years.




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ANNEXURE C: SAMPLE COMPAYRE REPORT



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