Our Engagements in Indian Corporate Governance

Active engagement on corporate governance has been an integral part of our investment management process since 1996.

Corporate governance has been an integral part of our investment management process since 1996. As an actively engaged shareholder, here are some notable examples of our experiences with management.


It’s no secret that India, like every emerging market, has seen its share of crony capitalism over the years. Since 1996, when we incorporated corporate governance considerations into our investment process, Quantum Advisors has carried the corporate governance torch in India. It is an integral component of any investment decision, and always has been.

Merely analyzing corporate governance quality is one thing, though; actually doing something about it when something is awry is another entirely. We’re proud to note that we have not shied away from engaging with and openly criticizing management teams over the years when we feel they have failed to uphold their duties to shareholders. It isn’t always a successful effort, but regardless of the outcome the importance of keeping boards accountable cannot be understated: creating an investment culture in which company board members are keenly aware that their actions will not be swept under the rug is essential to maintaining and enhancing the Indian capital markets’ respectability.


A few examples of our management engagements over the years:

Ranbaxy, 2008

Daiichi (Japan) offered to buy Ranbaxy’s two founders’ shares in entirety at a 23% premium to the market price, but offered minority shareholders the ability to tender only 20% of their shares at the sam


e price. We wrote to the board to express the gross dereliction of duty displayed by these actions, but unfortunately we were greeted with silence. As a result, we sold our shares completely.

While that alone is not a satisfactory conclusion, behavior like this is often an indicator that the company has been acting in less upstanding ways in other arenas as well. In the case of Ranbaxy, boy was it ever! It took no time at all for those concerns to bear out, as a whistleblower that same year flagged that the company had been fabricating drug test reports. Later that year the FDA issued two warning letters to the company, and just a few months after that, the FDA announced it would halt reviews of all drug applications emanating from that Ranbaxy plant. Four years after that, Ranbaxy pled guilty to felony charges relating to the manufacture and distribution of certain adulterated drugs and misrepresenting clinical generic drug data. Later, Daiichi had to pay $500 million to resolve a lawsuit and the federal charges that Ranbaxy had sold improperly manufactured drugs. Later, a Singapore tribunal awarded Daiichi INR 35 billion in damages from the founders in finding that they had concealed information of corporate wrongdoing when they sold the company.

Daiichi learned the old adage the hard way: lie down with dogs, wake up with fleas.

HDFC Bank, 2013

A sting operation carried out by an independent journalist group uncovered likely money laundering activities going on at HDFC Bank and two other private sector banks. To their credit, the bank’s board launched an immediate investigation and appointed Deloitte auditors to carry out an independent forensic inquiry. The bank initiated wholesale reviews of its training processes for ethical behavior and audited the specific branches singled out in the sting operation.

We immediately engaged with management at the bank, and they were responsive to our requests, taking time to walk us through the steps they were taking in response to the allegations. We suggested the bank was perhaps too focused on growth, which can incentivize nefarious behavior among employees. We evaluated the risks and ended up selling the stock.


In the end, HDFC Bank denied any money laundering was occurring, but did acknowledge the lapses by those employees. The Reserve Bank of India (RBI) also found no evidence of money laundering and imposed a small fine on the company. The bank changed its incentive structure to relieve the pressure on employees that led to some mis-selling of products and tightened up its internal processes to ensure proper compliance.

HDFC Bank remains one of the premier companies in India, and when valuation permits we have no objections to owning the shares.

ICICI Bank, 2018

Allegations surfaced in 2018 that ICICI Bank’s CEO had approved loans of INR 32.5 billion to the Videocon Group, which precipitated the CEO’s husband’s firm receiving INR 640 million of investments from Videocon into his companies. The CEO had not disclosed that conflict of interest to the board. The board’s response was exceptionally weak, clearing the CEO of any wrongdoing within a week without any investigation, instead relying on an investigation from two years prior which had cleared her.

We wrote to the board multiple times and met with the company’s CFO and an independent board member. We asked for an independent inquiry and for the CEO to step aside without pay and benefits until said inquiry could complete. After some resistance, the board finally capitulated and ordered an independent inquiry into the matter. 8 months later, the report found that the CEO had been in violation of the company’s code of conduct and her fiduciary duties. She was stripped of stock options and benefits, and a criminal investigation of the CEO was initiated and is still underway at this time.

Yes Bank, 2018

In September 2018, the RBI refused to extend founder Rana Kapoor’s tenure as the company’s CEO, based on its findings of serious lapses in the company’s governance, a poor compliance culture, and other serious regulatory violations over the prior three years. The bank’s board responded by forming a search committee to work on finding a replacement while requesting a one-year extension for Mr. Kapoor, which the RBI rejected.

We wrote to the board and suggested a range of steps to be taken: first, incorporating a proper succession plan to mitigate the risk of a leadership vacuum. Second, to develop a strong internal control and risk management framework to demonstrate the system could check untoward behavior by management. Soon afterwards, the bank announced that it had appointed an external candidate to be the new CEO: Ravneet Gill, who had been the CEO of Deutsche Bank’s India operations.

Larsen & Toubro (L&T), 2019

Mumbai was set to build an ambitious new coastal road project, partly contracted by L&T, to ease the city’s notorious traffic congestion. As work began, widespread protests erupted as the populace grew concerned about the wholly inadequate environmental studies that were completed as well as worries about the long-term ecological impact. Around the same time, the IT firm Cognizant admitted to the United States Department of Justice that it had paid bribes in India to secure permits to build its new campuses. These bribes had been routed through its main contractor for the projects, L&T. The board’s initial response was to remain silent on the coastal road project and issuance of a terse press release with an abdication of responsibility on the bribery front.

We immediately contacted the company and requested an explanation on the coastal road project, particularly whether L&T had commissioned an independent assessment of the environmental risks involved. L&T again absolved itself of any responsibility, deferring any such requirements to the clients (which in this case would be the city of Mumbai). We followed up with a letter to the board highlighting the stark liability the company faced in taking on the project without any assurance that proper environmental risk assessments had been done.

We separately contacted the board and requested an independent inquiry into the bribery allegations, as well as efforts to find and take action against the individuals who had been responsible for it. The company later issued a statement indicating they had conducted an internal review of the matter in 2017 and found no wrongdoing.

After these wholly insufficient responses, we demanded and received a meeting with the company’s CEO. In that meeting, we were given the same boilerplate responses the company had earlier issued, indicating an unwillingness to tackle either issue. In fact, the company had not even approached Cognizant to request details of the matter. L&T clearly had no interest in uncovering what had actually gone on with the bribery scandal, brazenly indifferent to an issue of enormous corporate importance. Meanwhile, given the tragic situation surrounding the company Vale in Brazil and its dam collapse, one would think it would become all the more urgent for L&T to ensure the environmental soundness of its project whether or not the client had conducted adequate studies.

Given these gross lapses in corporate governance, we exited our entire position in April 2019.

Overall Ethos

It’s clear that engagement with management teams doesn’t always achieve desired outcomes or even facilitate much change in how that company does business. While those instances are unfortunate, we continue to shine the light on corporate governance abuses and will hold companies to the highest standards. It can only be a good thing that more and more eyes around the world are beginning to tune in to the importance of corporate governance in investment management, and we look forward to fruitful engagements in the future.

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