The Hindu Business Line : MFs, insurers to go beyond balance sheet

While admitting the increasing relevance of corporate governance as a criterion for investment decisions, mutual funds and insurance companies say it is almost impossible to confirm the veracity of compliance by companies.

Now these institutional investors will not only look at balance sheets, but also at issues such as previous deals where valuations were not justified, legal cases, clients’ allegations regarding companies’ performances, or inadequate disclosures.

With mutual fund houses and insurance companies managing large amounts of retail investor money, it is essential that checks and balances are put in place before that money is invested.

More scrutiny

After the Satyam fiasco, investors would look to avoid companies with tainted profiles, said Mr Aneesh Srivastava, Chief Investment Officer, IDBI Fortis Life Insurance Company.

If there are corporate governance issues, investors would not be willing to make long term investments. But this might not be so when short-term investments are made, he said.

Going forward, it is a further tightening of the current procedures of due diligence which investors should do rather than adopt new methods, said Mr Sandesh Kirkire, Chief Executive Officer, Kotak Asset Management.

More risk-averse

Mr Sunil Kakar, Chief Financial Officer, Max New York life Insurance, said the recent development would make investors more risk-averse and they would avoid making investments if there are doubts about corporate governance.

“As a mutual fund house, we invest on behalf of a large number of retail investors and are accountable to them”, said Mr U K Sinha, CMD, UTI Mutual Fund. It is likely now that more money may go to public sector undertakings which seem more trustworthy, he said.

Though insurance companies and mutual funds will have to turn a sharper eye on the due-diligence process now, some say that there is only so much one can do.

Ultimately mutual funds will decide their investments on the basis of the balance sheet and financial figures of the company, which are made available to them, said Mr Kirkire.

“While making our investments, we take up a case by case view. We consider the company’s business model, quality management, financials and its corporate governance standards", Mr Srivastava said.

Due to the magnitude of the Satyam fraud, it is unlikely that any outsider even with the highest due diligence measures could have identified it, said Mr Sanjay Sinha, Chief Executive Officer, DBS Cholamandalam AMC.

There is no ready made solution or model to avoid and in a way detect such a happening, he added.

The fund manager’s job is to analyse the financials of a business and then invest the fund’s money.

It is the responsibility of the regulators, auditors and other officials in the company to check such happenings, said another fund manager.

More Stories on : General Insurance | Mutual Funds | Corporate Governance

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