A customer is silhouetted as they walk past logos of the Housing Development Finance Corp. displayed inside the bank’s branch in Mumbai, India. (Photographer: Vivek Prakash/Bloomberg)

How HDFC May Have Spared Itself Further Blushes

Deepak Parekh, chairman of housing finance company HDFC Ltd., retained his seat on the company’s board by the skin of his teeth.

In the annual general meeting of HDFC's shareholders, held on July 30, approval was sought to reappoint Parekh as non-executive director as he was liable to retire. Ordinarily, the appointment of director requires a simple majority of votes in favour of the resolution.

But the introduction of a new governance provision in SEBI's Listing Obligations and Disclosure Requirement Regulations now requires that any director above the age of 75 seeking reappointment must do so via a special resolution. In company law, a special resolution requires the votes cast in favour of the resolution to be not less than three times the votes cast against.

The governance provision, recommended by the Uday Kotak-led committee on corporate governance, comes into effect in April 2019. HDFC had to apply the yet-to-be-implemented standard right away as Parekh’s term of directorship would exceed April 2019.

As has been widely reported now, the resolution to reappoint Parekh received 75.14 percent votes in favour. 24.85 percent of the votes cast were against his reappointment.

But Parekh was not the only HDFC director who suffered a narrow miss. Bimal Jalan and Bansi Mehta might have met the same fate.

While it's not clear which institutions voted against Parekh, the one reason they likely did so was because two global proxy advisory firms recommended so.

Institutional Shareholder Services Inc or ISS recommended voting against Parekh's re-appointment as he “serves on a total of more than six public company boards”.

  • DP World Ltd.
  • Vedanta Resources Plc.
  • Fairfax India Holdings Corporation
  • HDFC Standard Life Insurance Co. Ltd.
  • GlaxoSmithKline Pharmaceuticals Ltd.
  • Siemens Ltd.
  • The Indian Hotels Co. Ltd.
  • Network 18 Media & Investments Ltd.

ISS’ proxy voting guidelines make clear that it will generally vote for the election of directors unless certain conditions are not met, one of them being—if the director is on more than six public company boards. The guidelines also specify that the same standards won’t be applied to key managerial personnel such as CEO or managing director whose removal would have a material impact on shareholder value.

To be sure, Indian law permits a director to hold a board seat on up to 10 public companies.

Deepak Parekh chairman of HDFC at a Bloomberg event. (Photographer: Dhiraj Singh/Bloomberg)
Deepak Parekh chairman of HDFC at a Bloomberg event. (Photographer: Dhiraj Singh/Bloomberg)

Glass Lewis, also a global proxy advisory company, found in its own assessment that the HDFC board is not independent enough. Though, just to clarify, the same cannot be said going by the letter of Indian law.

Given the lack of a sufficiently independent board, we recommend voting against nominee Deepak S. Parekh.
Glass Lewis Proxy Paper

As per Glass Lewis' assessment, four of HDFC’s independent directors are “affiliated” or have served on the board for more than 10 years. This has reduced the independence of the board to 20 percent, below the acceptable ratio of 50 percent.

Often, proxy advisory firms apply their own measurement and assessment standards that deviate from local law or hold companies to a higher standard of independence.

In Parekh’s case that’s what likely prompted the votes against him.

The Jalan And Mehta Story

Interestingly, both ISS and Glass Lewis had also recommended voting against Bimal Jalan and Bansi Mehta, independent directors at HDFC.

Former governor of the Reserve Bank of India and member of parliament, Jalan was first appointed to the company's board in 2008. Well-known accountant Bansi Mehta predates him by 20 years.

As both had crossed 75 years of age they too needed shareholder approval via special resolution to continue as directors up to the end of their current terms ie: July 2019.

ISS recommended voting against Jalan as he failed their board meeting attendance standard of at least 75 percent. Jalan attended just three of the six board meetings HDFC held in 2017-18.

Whereas the recommendation against Mehta's continuation was because, like Parekh, he too was on more than six public company boards.

Investors may be concerned whether directors are able to fulfill their fiduciary responsibilities when they are serving on a large number of boards, as in this case.
ISS Proxy Report
How HDFC May Have Spared Itself Further Blushes

Glass Lewis recommended voting against Jalan for the same reason as ISS stated.

"Director Bimal K. Jalan attended fewer than 75 percent of the meetings held by the board and/or the relevant committees during the past fiscal year. We view this as a failure to fulfill a fundamental responsibility to represent shareholders at such meetings."

As for Mehta, the proxy firm believes him to be an "affiliated" director. As a result it concluded that the Nomination and remuneration committee should not be chaired by him.

Mr. Mehta serves as chairman of the nomination and remuneration committee, which we believe should be held responsible for failing to nominate a sufficient number of independent directors.
Glass Lewis Proxy Paper

It's quite possible that Mehta and Jalan would have suffered a similar, if not worse, fate at the AGM as Parekh did.

But they escaped it.

Because a day before the shareholder meet Jalan and Mehta resigned as independent directors of HDFC. The company's filing with the stock exchange attributes the resignations to personal commitments and the company's efforts to "refresh its board of directors in a phased manner".

The reason and timing are both curious. On July 4, when the AGM notice was issued it discussed a board refresh and also proposed the continuation of the terms of Jalan and Mehta. Why, then, in a month did they change their minds?