Hedge Funds Adopt Activist Tactics in India

“After years of complaining about poor treatment as minority investors in India’s publicly traded companies, some Western hedge funds are turning to activist tactics that have not often been tried here,” writes the Wall Street Journal. “The recent moves may mark the beginning of a more confrontational period between foreign investors and Indian companies, which tend to be owned by either their founders or the government.”

India ETFs

For instance, last week, Chris Hohn’s The Children’s Investment Fund (TCI) began the process of taking legal action against the government of India in a bid to protect its investment in the state-run Coal India Ltd (CIL). TCI, which is Coal India’s largest shareholder after the Indian government, took exception with regarding to the coal company’s pricing structure, amongst other tactics, calling them “prejudicial to public interest and oppressive to shareholders.” In a letter to Coal India’s board, Hohn’s hedge fund “said that it had ‘sufficient evidence’ to show that the company’s board was simply following government instructions on business matters, rather than acting independently.” The letter continued by saying that “It is unacceptable that the board is… not protecting minority shareholders who have invested in good faith in the company.”

And, The Children’s Investment Fund is not the only hedge fund to go on the offensive. The Wall Street Journal reports that “a unit of New York hedge fund QVT Financial LP, which manages $5 billion in assets, has taken software-services firm Zenith Infotech Ltd. to court to try to recover money on bonds the company failed to repay last fall.”

Settling such matters in court is a “new one for India” and, as much as an improvement in corporate governance is needed there, just how effective these efforts will be is another story. One issue is that the court system in India has a notorious case backlog, so achieving results in this manner may not exactly be efficient. Further, there is also a possibility that proving such issues warrant court action may be difficult. As one ministry official said, it “does not interfere in any matter relating to the powers delegated” to Coal India, adding ,”There is no compulsion on TCI to retain” Coal India shares.

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