The Securities and Exchange Board of India (Sebi) on Tuesday issued the stewardship code for mutual funds (MFs) and alternative investment funds (AIFs), which they would be required to follow to improve corporate governance standards in their investee companies.
The code has laid six principles under which MFs and AIFs are required to adhere to when dealing with their investee companies.
Among the requirements, the investors shall have a clear policy identifying the circumstances for active intervention in the investee companies and the manner of such intervention.
“The policy should also involve regular assessment of the outcomes of such intervention. Intervention should be considered even when a passive investment policy is followed or if the volume of investment is low, if the circumstances so demand,” the code said.
According to the code, the circumstances for intervention may include financial performance of the company, corporate governance-related practices, remuneration, strategy, environment, social and governance risks, leadership issues, litigation, etc.
The investors can use various means to intervene. Apart from holding meetings with the company’s management, the investors could also vote against the resolutions or even collaborate with other investors with similar concerns.
The investors must also have a clear policy on voting and disclosure of voting activity.
The investors would also be required to periodically report on their stewardship activities.
Also, close monitoring of investee companies would be essential. “The investors should also keep in mind regulations on insider trading while seeking information from the investee companies for the purpose of monitoring,” the code said.
The code also requires investors to have a policy on how they would manage conflict of interest when fulfilling their stewardship responsibilities.
More importantly, all policies need to be publicly disclosed. “Every institutional investor should formulate a comprehensive policy on how it intends to fulfil the aforesaid stewardship responsibilities and disclose it publicly. In case any of the activities are outsourced, the policy should provide for the mechanism to ensure that in such cases, stewardship responsibilities are exercised properly and diligently,” the code said.
The Stewardship Code shall come into effect from the financial year beginning April 1, 2020.
The market watchdog observed that the importance of institutional investors in capital markets across the world is increasing. They are expected to shoulder greater responsibility towards their clients by enhancing monitoring and engagement with their investee companies, it said.
Sebi along with the Insurance Regulatory and Development Authority of India and Pension Fund Regulatory and Development Authority had subsequently examined a proposal for introducing stewardship principles in India, which were approved by a sub-committee of the Financial Stability and Development Council.