Mutual funds (MFs) are significant institutional investors in listed companies in India. Investments of MFs have grown exponentially to around ₹38 lakh crore by December 31, 2021, which is around 14 per cent of total market capitalisation. The total number of folios stood at 10 representing massive retail participation in listed companies through MFs.

Thus, MFs have emerged as “pillars of trust” of millions of investors not only for their investments but also for protecting value of investments through participation in corporate governance process.

While household shareholders may be justified in focusing on short-terms goals (financial performance), the controlling shareholders and institutional shareholders are expected to focus on sustaining performance and value by investee companies by playing an active role in the governance of investee companies.

Though props like ‘well diversified board composition’, ‘institution of independent directors’, ‘statutory and internal audits’, ‘secretarial audits’, ‘defined role of KMPs’, etc., help to enhance the corporate governance standards, the active participation of institutional investors will be more constructive to bring in a qualitative impact on the corporate governance issues and make companies to ‘think twice’ before putting up proposals for voting.

It has to be noted that the private promoters hold about 44 per cent of ownership in listed companies as against institutional investors’ holdings of about 34 per cent (MFs 7.2 per cent, insurance companies 5 per cent, and FPIs 22 per cent).

Governance standards

Regulators across the globe witnessed muted response of institutional shareholders to corporate actions due to which regulators had to prescribe a ‘stewardship code’ g

SEBI, in 2010, nudged MFs to disclose on their website their policies on exercising voting rights and also pattern of voting. In March 2014, AMCs were further required to record and disclose specific rationale supporting their voting decision (for, against or abstain).

SEBI recently introduced a Stewardship Code, effective from July 2020, for all MFs and all categories of Alternative Investment Funds (AIFs). This code is a prescription for active participation of MFs in the governance processes of investee company.

Reality check

It is too early to assess the impact of the stewardship code. However, an attempt was made to examine the seriousness attached by the mutual fund industry to this code and regulatory objective of improving governance standards through engagement by MFs. The stewardship policy enunciated by the top 10 MFs that account for 80 per cent of the total investments (AUM) in equity by MFs in India. reveals the following:.

Policy objective: The Stewardship Code prescribed by SEBI has given ample freedom and scope for the mutual friends to set up their own objectives and approach towards stewardship. Most of the MFs have not stated any objectives of stewardship policy and if stated, they said it in compliance with SEBI circular.

Engagement: Stewardship expects engagement with investee company, when required. Most of the AMCs are of the view that any engagement will be meaningful only if there is a possibility of success. These policy documents do not visualise any review mechanism to check effectiveness of engagement with investee companies. This gives rise to a question whether adherence to Stewardship Code is given the due seriousness.

Monitoring of investee companies is an important aspect of the Stewardship Code. The purpose of monitoring is to ascertain the strategy, performance, risk assessment, capital structure, issues relating to corporate governance, etc. However, to make monitoring worthwhile, there has to be an appropriate mechanism, structural arrangement and a decision on whether it will be a part of investment function or a specialist function.

Monitoring perspectives of investment manager/fund manager may be different from monitoring by a specialist. SEBI permits engaging a third party entity to render monitoring services. Most of the policy documents mention that there will be monitoring but process or organisational arrangement for monitoring is not mentioned.

Intervention: Investors may have to intervene when required or when engagement fails. There’s not much clarity about the kind of intervention or extent of intervention. Also, there was only mention of triggers for intervention and no defined linkage between type of intervention and intensity of concern. Some AMCs lined intervention with a threshold of investment or that they will intervene from an ESG perspective.

Collaboration: SEBI’s Stewardship Code itself has suggested a collaborative approach amongst MFs. Further, AMCs can utilise the provisions of the Companies Act for proposing resolutions at general meetings with collaborative effort. With these tools, the AMCs will be able to make a meaningful intervention and legally viable interventions when required.

However, when one examines the voting pattern of MFs on resolutions proposed, it appears that MFs are not collaborating; this is concluded based on the diversity in voting pattern of MFs on the same resolution i.e., while some MFs have voted for a resolution proposed, several others have voted against.

While conducting a reality check, it is observed that the policy statements on collaboration are not very clear. Many AMCs in India are a part of financial conglomerates; however, no AMC has mentioned clearly whether it would collaborate with a sister institutional investor. Moreover, AMCs have not visualised setting up a collective body to make collaborations a routine process.

Managing conflicts: The conflict between the AMC and the investee company may arise under certain circumstances, which include investment of the investee company in scheme/s of the mutual fund or other business relationships between the investee company and the mutual fund.

In practice, however, it is observed that conflicts arising out of investment in equity and debt of an investee company has not been visualised by any AMC at all. For example, investment by one scheme of mutual fund into the equity and another scheme in debt of the investee company may need conflicting interventions. Even such common situations have neither been visualised nor identified by the AMCs.

Analysis of voting patterns

As per the SEBI requirements, every mutual fund has to formulate a voting policy. This voting policy and voting decisions (whether to vote for or against or abstain in response to corporate events) are taken by a board approved investment management committee or voting committee.

A reality-check on the voting policies and voting patterns of 12 MFs, which hold more than 90 per cent of equity assets of the entire mutual fund industry, was conducted over a period of five years (from 2014-15 to 2018-19). The analysis indicates that MFs have voted in favour of investee company resolutions on 87 per cent of instances, voted against in 4 per cent of instances and abstained from voting in 8 per cent of instances.

The voting pattern continues to remain the same even during the last two years. For example, both during 2019-20 and 2020-21, 91 per cent of AMCs had voted in favour of the promoter’s resolutions, while 5 per cent abstained from voting and remaining 4 per cent voted against the resolutions.

Abstaining from voting may not be in good spirit, as it will mean that the AMCs are actually supporting the management. It is seen that, even after stewardship code is made effective, more or less the same trend continued in 2020-21 as well. It seems that stewardship has not steered the MFs towards objective participation in general meetings — the old pattern simply continued.

Way forward

Institutional investors may have to put in place appropriate policies towards objective engagement, effective intervention and meaningful collaboration if the intended objectives of the Stewardship Code are to be achieved.

The collaboration should extend beyond the mutual fund industry and reach insurance companies and FPIs as well. This will help in improving corporate governance standards in our country.

The writers are faculty at NISM. Views are personal

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