Funds target firms with governance issues

Stung by the Satyam scandal, heads of five leading fund houses are working on a stricter due-diligence system to identify companies that have a questionable record with regards to corporate governance.

“The main idea is to reduce/stop investments in companies that do not provide correct information to investors. Also, we are looking at ways to make our decision public, so that other investors are also aware of the company’s standing with fund houses,” said a leading fund manager.

According to sources close to the development, this idea was first mooted at a meeting of top asset management companies (AMC) – ICICI Prudential Mutual Fund, Reliance Mutual Fund, HDFC Mutual Fund, Franklin Templeton Mutal Fund and Birla Sun Life Mutual Fund — soon after the Satyam fiasco. A couple of foreign institutional investors (FIIs) were also present in this meeting.

After former Satyam chairman B Ramalinga Raju admitted to ‘cooking up the balance sheet for years’, the company’s share price fell by 70 per cent in a single trading session on January 7. This led to panic selling of Satyam stock by a large number of fund houses, including BNP Paribas, HDFC Mutual Fund and ICICI Prudential, at throwaway prices.

Later, even FIIs such as Fidelity Management and Research, Morgan Stanley Mauritius and Aberdeen Asset Managers offloaded the stock at a loss.

With the results season around the corner and market regulator Securities and Exchange Board of India (Sebi) initiating peer review, fund houses are gearing up to take a fresh call on companies.

“Since every fund house remained busy in the last couple of months securing their assets under management (AUMs) as well as maintaining a decent net asset value (NAV), issues like corporate governance had taken a backseat. However, now fund managers would like to play an active role in identifying companies with severe corporate governance issues,” said another fund manager.

Fund houses could take stern steps in case of an errant company. For one, the name of the company could be put up on the website of the Association of Mutual Funds in India (Amfi). That step would be taken to explain fund houses’ low exposure to the company. Also, the AMCs are planning to put up the names of errant companies on their individual websites.

Fund managers said it has been decided that each fund house would identify three-to-five companies that did not give adequate financial information and had too many corporate governance issues.

“In leading Western markets, analysts champion the cause of minority shareholders by writing forcefully about adverse corporate governance practices,” said Saurabh Mukherjea, head of equities at UK-based equity research house Noble Group, which provides research to several leading FIIs in India

However, some analysts said that many fund houses could find it difficult to point fingers at specific companies as there would be fears of management access as well as business denials. “At present, this is just a proposal from some fund managers. To make it a success, we require cooperation from the entire industry and also the regulators. Otherwise, the entire idea could come under pressure from corporate houses,” said a chief investment officer.