Markets

Why the Stewardship Code is a win-win for all

KS Badri Narayanan Chennai | Updated on December 27, 2019 Published on December 28, 2019

The new norms from SEBI have come at a right time as many corporates are struggling with reputational issues

SEBI recently put in place a mandatory ‘Stewardship Code’ for mutual funds and all categories of alternative investment funds (AIFs) with regard to their investment in listed equities.

The code is for institutional investors who are expected to shoulder greater responsibility towards their clients/beneficiaries by beefing up the monitoring mechanism and stepping up engagement with their investee companies.

There are 633 SEBI-registered AIFs. The new norms broadly cover the following six areas:

Responsibilities: Stewardship responsibilities include monitoring and actively engaging with investee companies on various matters including performance (operational, financial, etc), strategy, corporate governance (including board structure, remuneration), material environmental, social and governance (ESG) opportunities or risks and capital structure. Every institutional investor should formulate a comprehensive policy on how it intends to fulfil the aforesaid stewardship responsibilities and disclose it publicly.

Conflict of interest: The policy should be intended to ensure that the interest of the client/beneficiary is placed before the interest of the entity.

Monitoring: The institutional investor should have a policy on continuous monitoring in respect of all aspects they consider important including performance, corporate governance, strategy and risks.

Intervention and collaboration: Investors should have a clear policy on intervention (in case of poor financial performance, corporate governance) in their investee companies and also have a clear policy for collaboration with other institutional investors wherever required, to protect the interests of the ultimate investors.

Voting and disclosure : This requires a comprehensive voting policy to be framed by the institutional investors including details on voting mechanism, circumstances under which voting should be for/against, abstention, and disclosure.

Periodical reporting: Institutional investors shall periodically report to their clients/beneficiaries on how they have fulfilled their stewardship responsibilities

The code will come into effect from April 1, 2020.

The new code has come at the right time as many corporates are currently struggling with reputational issues. This would provide an excellent opportunity for them to engage with the institutional investors directly and showcase their business models with pros and cons. Any suggestions from institutional investors would also lead to welcome course corrections.

Besides, this would help corporates in getting information about investors’ voting preference, prior to corporate actions.

Institutional investors will benefit by extracting more details and information from the companies, and hence, take informed decisions.

All these moves should eventually benefit original investors.

Published on December 28, 2019
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