Sebi panel moots new Code for institutional investors

The move is aimed to push institutional investors into greater engagement in governance matters of listed firms

To push institutional investors into greater engagement in governance matters of listed firms, a high-level advisory body of regulator Sebi, the International Advisory Board (IAB), has suggested a new code on the lines of the Stewardship Code of the UK.

The UK Code, which has been in place since 2010, is aimed at enhancing "the quality of engagement between asset managers and companies to help improve long-term risk-adjusted returns to shareholders".

While Sebi has already mandated mutual funds to disclose a specific rationale supporting their voting decisions on proposals placed before shareholders by the listed companies, it has been felt that there is a need to further expand this requirement to other institutional investors as well.

Besides mutual funds, the major institutional investors in listed companies in India include foreign institutions, insurers, banks, hedge funds and corporate bodies.

In its last meeting, Sebi's advisory body felt that the participation of mutual funds has almost doubled after the regulator asked the fund houses to disclose the rationale behind their voting decisions.

A similar move for other classes of investors would help further enhance the participation of institutional investors in governance matters.

"IAB recommended that Sebi in coordination with other authorities may introduce a Code -- on the lines of Stewardship Code of UK -- based on the approach of comply or explain," Sebi has said.

The matter is being looked into by Sebi and it would involve discussions with other regulators including IRDAI for insurers, RBI for banks and PFRDA for pension funds.

As per the Financial Reporting Council of the UK, the Stewardship Code there aims "to foster a better quality of engagement between companies and investors, which will assist in delivering better company performance and thus better returns to investors".

The Code sets out a number of areas of good practice to which the FRC believes institutional investors should aspire. It also describes steps asset owners can take to protect and enhance the value that accrues to the ultimate beneficiary.

It is applied on a 'comply or explain' basis.

All UK-authorised asset managers are required to publish a statement of commitment to the Stewardship Code or explain why it is not appropriate to their business model.

Disclosures made in relation to the Code are supposed to help companies understand the approach and expectations of their major shareholders, FRC said.