The corporate governance committee's proposal to put in place a common stewardship code may compel Life Insurance Corporation of India (LIC) and top mutual funds to play a more active role in corporate governance.
At present, there is no specific provision for a 'stewardship code' under the Sebi regulations. For mutual funds, certain stewardship principles such as on voting and conflict of interest have been adopted. Insurance regulator Irdai in March 2017 issued a stewardship code for insurance companies in India.
"Over the years, disclosures on the voting patterns of mutual funds have gradually improved and insurance companies are now likely to come under increasing pressure to start voting on shareholder resolutions," said Shriram Subramanian, founder and managing director of InGovern Research Services, a proxy advisory firm.
"The 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," added Sai Venkateshwaran, partner and head - accounting advisory services, KPMG India.
Sebi has been pushing mutual funds 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 is down to 10 per cent in 2016 from earlier levels of over 80 per cent, as per proxy advisory firm IiAS.
While laws have empowered minority shareholders on a number of counts, such rights have not been effectively put to use by these shareholders, barring a few instances where their influence has been evident, said experts. "Insurers have been inconsistent in voting on shareholder resolutions. While some insurers are proactive and have been voting, others have waited for a regulatory push," observed a recent report by IiAS.
According to Subramanian, minority shareholders can now use regulations such as the Bankruptcy Code or provisions in the Companies Act to raise concerns of financial wrongdoings. However, their objectives can only be achieved if institutional investors such as mutual funds and insurance companies lend their support, he said.
In 2014, for instance, seven fund houses had got together to oppose Maruti Suzuki's proposed deal to transfer a Gujarat plant by Maruti to its parent firm Suzuki Motor Corp.
There may be practical difficulties in implementing the stewardship code. First, mutual funds manage liquid assets for several corporates running into hundreds of crores. "The fund houses will think twice before going against the management of these companies as the latter may withdraw the amounts parked in these mutual funds. Second, many of the mutual funds and insurance companies themselves are owned by large corporates, and this may restrict their participation," observed Subramanian.
The 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 on formal board positions, where possible, and also through voting at shareholder meetings. Once the institutional shareholders take on an active role, the benefits will percolate to the retail 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 may be less measurable. However, engagement efforts have yielded results in the past," noted the IiAS report.