Markets regulator SEBI on Tuesday put in place a mandatory "stewardship code" for mutual funds and all categories of alternative investment funds (AIFs) with regard to their investment in listed equities.
Stewardship code is a principles-based framework that assists institutional investors in fulfilling their responsibilities to help them protect and enhance the value of their clients and beneficiaries. Adherence to the code by institutional investors also enhances the corporate governance of the investee companies.
The stewardship code will come into effect from the financial year beginning April 1, 2020, Securities and Exchange Board of India (SEBI) said in a circular.
SEBI along with Insurance Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development Authority (PFRDA) examined a proposal for introducing stewardship principles in India, which was approved by a sub-committee of the Financial Stability and Development Council (FSDC-SC).
Pursuant to this, "it has been decided that all mutual funds and all categories of AIFs shall mandatorily follow the Stewardship Code ...in relation to their investment in listed equities," the regulator said.
Under the stewardship code, every institutional investor needs to formulate a comprehensive policy on the discharge of their stewardship responsibilities, publicly disclose it, review and update it periodically.
Besides, such investors need to have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.
In addition, they are required to have a policy on continuous monitoring of their investee companies in respect of many aspects, including performance of the companies, corporate governance, strategy, risks among others.
Further, they are required to have a framework to identify the circumstances for active intervention in the investee companies and 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 regulator said.
Circumstances for intervention also include poor financial performance of the company, corporate governance related practices, remuneration, strategy, risks, leadership issues and litigation, SEBI said.
Further, SEBI said and institutional investors need to put in place a comprehensive voting policy including details of mechanisms of voting, circumstances in which voting should be abstain and use of proxy voting, among others. The move is aimed at such investors taking their own voting decisions in the investee company after in-depth analysis rather than blindly supporting the management decisions.
Also, the regulator said that institutional investors should report periodically on their stewardship activities in an easy-to-understand format.
Stewardship obligations are becoming more important today due to increased institutional investors ownership of various companies and a large portion of such institutional investors represent directly or indirectly public funds.
Globally, Britain was the first to recognise stewardship obligations way back in 2010, followed by Japan and Malaysia.
In India, SEBI issued a circular in 2010 to mutual funds and asking them to disclose periodically how they vote on various resolutions and over the years strengthened mutual funds participations.