Vedanta Accounts, UK Sinha Reappointment Fail To Get Institutional Investor Support
India's commodity major Vedanta Ltd. has witnessed a rare show of no-confidence by institutional investors.
A majority of institutional investor votes cast at the annual general meeting, held on Aug. 10, were against the adoption of annual financial accounts and the appointment of three independent directors, one of them a former securities market regulator.
Institutional investors own close to a fifth of the company's shares (20.89%), of which foreign portfolio investors are the largest shareholders (10.29%). Overall, the public shareholding in Vedanta is 34.50% and promoter Anil Agarwal-led entities own 65.18%.
Just over half, or 50.60%, of the institutional investor votes cast were against the adoption of standalone and consolidated financial accounts for fiscal year 2020-21. A large number of institutional investors shares were voted on, 77.54%, making the veto a significant one.
To be clear, the resolution passed and the accounts were adopted on the back of promoter and public non-institutional votes.
At the AGM, shareholders were also to vote on four resolutions regarding appointment of three and re-appointment of one independent director.
The re-appointment of UK Sinha, former securities market regulator, was rejected by institutional shareholders. 75.78% of shares owned by institutional investors were voted on. An overwhelming majority were against the resolution. 70.70% to be precise.
Again, the special resolution passed due to promoter and public non-institutional support.
The appointment of Padmini Somani as an independent director for the first term of two years was supported by institutional investors but that of Dindayal Jalan and Akhilesh Joshi, both independent directors for the first term, failed to get majority support of institutional votes cast. Yet, all resolutions passed due to promoter and public non-institutional support.
Institutional shareholders are expressing their exasperation over the company's governance, said Amit Tandon, founder and managing director of proxy advisory firm IiAS.
Over the last few years Vedanta’s parent has trampled over its minority investors while the board has mutely watched. And though shareholders protested, they were not heard. Now the shareholders have used the meeting to signal their exasperation and overwhelmingly voted against the appointment of three independent directors. They have also taken serious note of the auditor's qualified opinion regarding internal financial controls.Amit Tandon, Founder and MD, IiAS
A Vedanta company spokesperson said the company has received requisite number of votes in favour for all its resolutions put to shareholders at the AGM.
"The resolutions pertaining to the accounts, appointment of directors were approved with an average majority of 85%. Further, we have a strong and diverse board. The induction of the new directors will strengthen the board and management oversight, steers our strategic direction and creating long term shareholder value," the company's emailed statement said.
The Accounts Veto
In their pre-AGM reports, both proxy advisory firms IiAS and SES had recommended shareholders vote against the adoption of accounts due to the auditor qualification on internal financial controls.
Vedanta's independent auditor's report for FY21 included a qualification that "material weakness has been identified in the effectiveness of the company’s internal financial controls."
This material weakness had to do with benchmarking of terms in loans and guarantees between the company and its subsidiaries or affiliates. This could "potentially result in loans being advanced and guarantees being issued in a manner which may impact the recognition, measurement and disclosure of such transactions in the financial statement," the auditor's report said.
SR Batliboi is the company's statutory auditor and its reappointment this year was supported by 100% of institutional votes cast and passed.
The Vote Against Independent Directors
IiAS and SES had also recommended shareholders vote against three of the four independent directors up for appointment.
Dindayal Jalan and Akhilesh Joshi both worked at various Vedanta group companies and affiliates in senior executive positions such as chief financial officer and chief executive officer, till as recently as 2016.
"We do not support former executives who are on the board along with their previous supervisors, independent of whether these executives have completed a three-year cooling period. The board must consider appointing him as a non-executive director instead," the IiAS report said on each.
As for why shareholders should vote against the reappointment of former SEBI Chairman UK Sinha, IiAS had said: "He has been on the board since March 13, 2018. We believe the current independent directors have not protected the minority shareholder rights by maintaining a passive stance and allowing cash flow support to the group through the company and HZL (Hindustan Zinc). We therefore do not support Upendra Kumar Sinha’s reappointment as an independent director to Vedanta’s board."
SES had recommended voting against Sinha's reappointment on concerns regarding the auditor's qualification. "...as he being an independent director as well as an audit committee member and getting a qualified accounts from auditors on account of related party transactions must be accountable to shareholders for such a state of affairs."
It is not common to see institutions voting against adoption of accounts, Gupta noted in a written comment. This demonstrates their "angst against related party transactions which are benefitting promoters," he added.
According to him, the institutional investors' vote against appointment of independent directors reflects their assessment that the fault doesn’t lie at the door of promoters only but independent directors are equally to blame.
"If at all the proposal of SEBI to have a two-tier appointment system was in vogue, all three proposed independent director appointments would have failed."
An earlier version of the story was updated to include the views of proxy advisory firm SES and the response from Vedanta's spokesperson.