Institutional investors may get an active role

Shareholders such as LIC, mutual funds can’t remain silent spectators

The Uday Kotak-led committee on corporate governance's proposal to put in place a common 'stewardship code’ might compel Life Insurance Corporation of India (LIC) and top mutual funds (MFs) to play a more active role in this regard.

At present, there is no specific provision for such a code under Securities and Exchange Board of India (Sebi) regulations. For MFs, some stewardship principles have been adopted, such as on voting and conflict of interest. In March, the Insurance Regulatory and Development Authority of India (Irdai) issued a stewardship code for companies in its ambit.

“Over the years, disclosure on the voting patterns of MFs have gradually improved and insurance companies are now likely to come under increasing pressure to start voting on shareholder resolutions,” says Shriram Subramanian, founder and managing director of InGovern Research Services, an advisory entity on corporate governance.

“The (proposed) code will make it a formal mandate for institutional investors to play a stewardship role, rather than remain silent spectators with respect to the affairs of their investee companies,” says Sai Venkateshwaran, partner and head of accounting advisory services at consultancy KPMG India.

Sebi has been pushing MFs to vote on shareholder resolutions since 2010 — from having a voting policy to disclosing their voting rationale. In the process, MFs’ abstention from voting on shareholder resolutions was down to 10 per cent in 2016 from earlier levels of over 80 per cent, says proxy advisory IiAS.

While laws have empowered minority shareholders on a number of counts, such rights have not been effectively put to use by them, barring some instances where their influence has been evident, say experts. “Insurers have been inconsistent in voting on shareholder resolutions. While some are proactive and have been voting, others have waited for a regulatory push,” observes a recent report from IiAS.

According to Subramanian, minority shareholders can use regulations such as the new Bankruptcy Code or provisions in the Companies Act to raise concern on financial wrongdoing. However, the objectives can only be achieved if institutional investors such as MFs and insurance companies lend support, he said.

In 2014, for instance, seven fund houses had got together to oppose Maruti Suzuki’s proposed deal to transfer an upcoming Gujarat factory to parent Suzuki Motor Corp of Japan.

There could be practical difficulties in implementing a stewardship code. First, MFs manage liquid assets for several companies, in hundreds of crore. “Fund houses will think twice before going against the management of these companies — the latter might withdraw the amounts parked in these funds. Second, many MFs and insurance companies are themselves owned by large corporates,” observes Subramanian.

A stewardship code will help institutional investors to engage constructively with companies on matters ranging from strategy, governance and performance to risk management. “The form of engagement could vary from periodic meetings with the company management to taking normal board positions, where possible, and also through voting at shareholder meetings. Once institutional shareholders take on an active role, the benefits will percolate to retail (small) shareholders,” said Venkateshwaran.

According to IiAS, an engagement mechanism — one that entails connecting with the management of investee companies with regard to strategy and performance, as well as environmental, social and governance issues — is less tangible than voting on shareholder resolutions. “The outcomes of these discussions are not easily quantifiable and the success of these efforts might be less measurable. However, engagement efforts have yielded results in the past,” goes its report.