Shareholders’ Activism in India: Understanding characteristics of companies targeted by activist shareholders using discriminant analysis

Abstract

With every passing year, India is witnessing intense shareholder activism. The number of proposals rejected by the institutional shareholders has been increasing over the years since 2014 since the implementation of the Companies Act, 2013 in India. Furthermore, the introduction of various SEBI (Securities and Exchange Board of India) regulations has improved the corporate governance framework in India. As per the global literature, issues raised by activist shareholders falls in any one of the following four categories – Board of directors related issues, Executive / Senior Management related issues, Financial Performance and Valuation related issues, Idle Cash and Capital Structure related issues and Miscellaneous issues (Other issues which are not part of any of the above category). The proposals rejected by institutional shareholders in listed Indian companies revealed that Director related issues (such as the appointment of directors and compensation of directors) are the most important set of issues in the Indian context. Over the period, Indian regulators (such as SEBI, IRDAI etc.) have tightened regulations which further enhanced corporate governance framework in India. In our earlier paper, we have identified issues raised by activist shareholders across the globe. Our next step is to study characteristics of companies targeted by activist investors. We have shortlisted set of companies where proposals were rejected by the institutional investors. We have used discriminant analysis which is one of the widely used predictive analysis technique. The discriminant analysis explores the relationship between the discriminators (set of independent variables) and the dependent variable. Various performance parameters are used as discriminators or independent variables along with dependent dichotomous variable. We have chosen companies where proposals were rejected by the institutional shareholders. Limitation of the study is that there are multiple instances where proposals were rejected by very thin margins. An extension of this study could be understanding views of various stakeholder of capital market (i.e., investors, advisors, merchant bankers, CXOs of the companies etc.). Target audience for the paper includes academician, policymakers and industry professionals. We have presented discriminant analysis as a methodology which can be used beyond bankruptcy and risk models.