Italian stationery and art supplies maker Fabbrica Italiana Lapis ed Affini SpA (FILA) is one of the promoters. The other set of promoters, who are based in India, include Santosh Raveshia, Sanjay Rajani, Ketan Rajani and Chandni Somaiya, among others. Together, the two promoters groups own 70.39% of the company’s shares.
However, three proxy advisory firms have recommended that shareholders vote against three resolutions put forth by the company that would enshrine this pre-initial public offering (IPO) agreement between its promoters into its articles of association.
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If approved, these resolutions will effectively give the company’s Indian promoters the right to appoint the managing director, its Italian promoter FILA to appoint the chairman, and distribute the rights to appoint various board committees between them. The promoters will also have rights on board nominations corresponding to their shareholding.
The company could also expand its board from a maximum of 15 to 20 directors. Currently, it has 12 directors, four of who are independent.
The Indian company will give exclusive rights to FILA to distribute its products in export markets where the Italian company already has a presence, as part of a shareholder’s agreement put forth by the company for shareholder ratification. Meanwhile, DOMS will have exclusive rights to distribute FILA products in India, Nepal, Bhutan, Sri Lanka, Bangladesh, Myanmar and Maldives.
Lastly, FILA will have access to the financial and non-financial information of DOMS Industries on a monthly basis.
Proxy advisory firms InGovern, Institutional Investor Advisory Services (IiAS) and Stakeholder Empowerment Services (SES) have recommended that shareholders vote against the three resolutions put forth by the stationery company citing corporate governance concerns.
“As a governance best practice, we recommend the Chair of the Board should be an Independent Director. We do not support clauses that allow a promoter to nominate Chair,” InGovern noted in its report published this month.
Meanwhile, it said the appointment of the managing director should be done in consultation with the nomination and remuneration committee, which should consist of only independent directors. It should not be the exclusive prerogative of the Indian promoters, it said.
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The clause allowing FILA exclusive distribution rights for products made by DOMS in export markets where it is already present “restricts the company’s future exports and profitability based on FILA’s decisions”, proxy advisor IiAS noted in its report.
Pre-IPO agreement
DOMS Industries said these agreements with FILA existed before its IPO but had to be terminated during the listing process.
“We had this agreement with FILA since 2012. However, when we were going for the IPO, Sebi (Securities and Exchange Board of India) said that we had to terminate the agreement and renew it post listing with shareholder approval. That is what we are doing now,” a spokesperson for the company said.
SES said that similarly sized companies have a board strength of about nine. Currently, DOMS has a board consisting of twelve directors – four executive directors, four non-executive non-independent directors and four independent directors.
“To SES, it appears that the proposed increase is de-linked from any requirements of the Company. Rather, it seems to be a provision being created to accommodate the “Special Rights” clause that is contained under the (shareholders agreement,” the proxy advisory firm noted in its report.
The DOMS spokesperson said that the company wants to increase the board size to accommodate a non-independent chairperson appointed by FILA. Having a non-independent chairperson would make it mandatory for the company to have half of its board members to be independent by law.
The company wants a larger board to accommodate eight independent directors, which would take its total board strength to 16 – more than the 15 currently allowed by its articles of association.
Italian stationery and art supplies maker FILA, which invested in DOMS in 2012, currently holds 26.01% stake in the company. The company’s Indian promoters control 44.37%, taking the total promoter shareholding to 70.39%.
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The special resolutions put forth by the company would need at least 75% shareholder votes in favour for ratification. A negative verdict by proxy advisory firms could put in jeopardy the company’s plans to return to its pre-IPO status quo. Institutional investors like mutual funds, insurance companies and foreign funds, which control about 25.72% of the company, rely on the inputs of proxy advisors for their voting decisions.
The e-voting on the resolutions began on 27 March and will close on Friday, 25 April at 5 pm.
“The company has been implementing strategic initiatives over the last couple of years, and these efforts are expected to bear fruit in the coming year,” analysts at Axis Securities said in a note on 5 February. Key initiatives include focus on operational efficiency, expansion into the pens category from its focus on pencils, investment in a greenfield manufacturing facility and expansion of its distribution channel.
Shares of DOMS Industries gained 3.9% on Tuesday to close at ₹3,010. The stock has gained 66% in the last year compared to an 8% gain in benchmark Sensex over the same period. Known for its pencils, the company has a market capitalization of ₹18,266 crore.
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