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To improve transparency and encourage mutual funds to diligently exercise their voting rights in the interests of unitholders, SEBI’s recent circular has mandated mutual fund houses to compulsorily vote on all resolutions involving approval.
Until now, MFs were only required to record and disclose the rationale behind exercising their voting rights in companies, but were not required to compulsorily vote.
However, MFs with no economic interest on the voting day may be exempted from compulsorily casting votes, SEBI said.
From April 1, MFs have to compulsorily vote in all corporate governance matters: changes in the state of incorporation merger and other corporate restructuring and anti-takeover provisions; changes to capital structure, including increases and decreases of capital and preferred stock issuances; stock option plans and other management compensation issues; social and corporate responsibility issues; appointment and removal of directors; any other issue that may affect the interest of the shareholders, in general, and unitholders in particular.
Passive funds included
The directive will also apply to passive schemes of the fund houses, including index funds and index ETFs, SEBI added. SEBI has also clarified that if any specific fund manager of a particular MF scheme has a strong opinion against the fund’s views, a scheme-level vote can be allowed, subject to detailed recording of the rationale for the difference.
The move will have a major impact as MFs currently hold about 8 per cent in NSE-listed companies and 10 per cent in Nifty50 companies.
Even fund managers of Nifty 50 ETFs and Sensex ETFs, in which the Employees Provident Fund Organisation invests, and other passive index funds such as Bharat ETF and Bank ETFs have to be more assertive in corporate actions.
Fund managers have to keep a close watch on developments or resolutions that are against the interest of minority shareholders, especially retail investors. So far, in most of the resolutions, MFs had overwhelmingly “voted-in favour” and hardly raised any questions. Even in cases such as YES Bank, MFs rarely opposed management proposals.
Go for sustainable performance
More assertive mutual funds will force India Inc to think twice before proposing shareholder-unfriendly resolutions. Instead of wealth maximisation or chasing financial returns alone, the new move will also help fund managers identify companies with sustainable performance and high corporate integrity in a more holistic manner.
With more fund houses launching schemes based on overseas themes, SEBI should also clarify on the voting pattern of fund managers in overseas companies.
Till 2010, MFs abstained from voting in almost 90 per cent of the issues. However, after SEBI’s regulation in 2010 and a further tweak in 2013 on voting, absenteeism by MFs came down drastically and their participation rose to 90-95 per cent. With the new move, we can see more mutual funds turning assertive and vocal on issues concerting investors.
However, there is also fear that the move may lead to a rise in compliance costs for fund houses.
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