Institutional Investors Dissented Most Against ESOPs, Director Appointments In FY21

Director appointments ranked the highest among the resolutions defeated by shareholders of Indian companies in 2020-21. But it were the proposals regarding employee stock options that faced the maximum pushback from institutional investors.

A total of 3,776 resolutions were presented for voting by Nifty 500 companies in FY21, according to a report by Institutional Investor Advisory Services. Of these, only 15 were defeated.

Apart from that, 13 resolutions were withdrawn, with some pulled back on the morning of the meeting—a hint that these were defeated.

Institutional investors own 26.83% of the outstanding shares issued by the NSE Nifty 500 companies. They voted 77.1% of the shares they held, predominantly supporting resolutions. Of those who participated, 95.85% of the shares voted for, while 4.15% voted against.

In 18 resolutions, 100% of the institutional votes were cast against. These are spread across six categories:

• Director appointment: 9.

• Adoption of accounts: 3.

• ESOPs: 2.

• Remuneration: 2.

• Borrowings: 1.

• Issue of securities: 1.

Despite more director appointment resolutions being defeated, ESOP-related resolutions saw the highest dissent as it was most voted against by institutional investors, followed by related-party transactions.

This is a function of the "philosophical differences" between promoters and investors, IiAS said. "While managements view ESOPs as deferred compensation and are frequently proposed to be issued at a discount to the market price, investors view ESOPs as pay at risk. They want to see a more durable alignment between their interests with those of the management and staff and so want to see these issued at or close to the market price."

Other categories that saw dissent are related party-transactions, restrictions on the power of the board, and remuneration and compensation.

"The degree of push-back from institutional investors is higher for Nifty 100 companies than for the rest, which is likely a function of higher institutional interest in the larger companies," the report said.

Promoters, who own 55.96% of Nifty 500 companies’ equity, almost always voted in support of resolution. The 0.03% of the times they voted against any particular resolution is largely in case of intra-promoter group disputes.

India's markets regulator has also made it compulsory for mutual funds to vote their entire ownership across all resolutions. IiAS says this will "no doubt" mean some increase in institutional voting from the current 77.1% of their shareholding. But insurers, pension funds and foreign portfolio investors should also be nudged to vote, it said.

"Unless more resolutions are classified as special resolutions, or those where majority of minority investors vote (like promoters cannot vote their own salary), the voting outcomes will not change materially."