Ensuring corporate governance

Disapproval of a company's actions by institutional investors results in loss of investor confidence and, thereby, acts as a deterrent.

Sudipto Roy        Print Edition: June, 2010

The mutual fund industry in India has witnessed a flurry of change, regulatory and otherwise, in the past couple of years. Initially, the changes were in response to the global market meltdown in 2008. The recent measures, however, are intended to promote retail participation in equities through the institutional route, rather than directly. The establishment is urging the industry to move towards a sustainable and inclusive pan-India growth to institutionalise equity investments and enforce better corporate governance.

The recent developments in the global and Indian markets as well as the corporate space have renewed the need for better corporate governance. While regulations play an important role, institutional investors should also be actively involved. When investee companies take important decisions, institutional investors can protect people's interests by voting against moves that have suspect motives. Disapproval of a company's actions by institutional investors is taken seriously by markets. It results in loss of investor confidence and, thereby, acts as a deterrent.

Currently, mutual funds are important institutional investors and can ensure better corporate governance among listed companies. In a recent guideline, Sebi has asked the AMCs to disclose general policies and procedures for exercising voting rights on shares held by them (on their respective AMC Websites and in annual reports). In addition, AMCs have been advised to disclose their proxy votes being exercised on specific issues relating to investee companies. Many developed markets, such as the US, also stress on public disclosure of voting patterns. Such regulations improve corporate governance among listed companies.

Mutual funds also have an immense potential for growth. In India, only about 4 per cent of household financial savings are in mutual funds. In developed markets, such as the US, the share of household financial assets held by investment companies is about 21 per cent. This number grew from just 3 per cent in the 1980s to 21 per cent in 2009.

More importantly, in India, only 3.6 per cent of the savings account customers are mutual funds investors. In order to tap this potential, the industry has to work towards increasing investor awareness on mutual funds and provide solutions to retail investors. Transparency, flexibility, tax efficiency, market-driven returns, access and ease of operation are the fundamental attributes that help decide the preference for an investment tool (for savings) by retail investors. By design, mutual funds are superior in all these parameters.

When it comes to transparency, the mutual fund industry can claim to be at the forefront. In fact, it is an important factor in the increasing acceptability of mutual funds. Despite being required to disclose the portfolio for open-ended schemes once in six months, most mutual funds have been voluntarily making disclosures in monthly factsheets. Mutual funds also offer easy accessibility. Besides the registered agents, online access through trading platforms makes them readily available. Mutual funds can also be traded through recognised stock exchanges.

Sudipto Roy is Business Head of Principal Mutual Fund

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