SEBI has made it mandatory for all MFs and AIFs to follow a ‘Stewardship Code’ in relation to their investment in listed equities.
Institutional investors such as MFs and AIFs should enhance monitoring and engagement with their investee companies. For instance, institutional investors should engage with investee companies on operational performance, financial performance, strategy, corporate governance, remuneration, ESG guidelines and so on. The regulator feels such increased engagement would improve corporate governance and benefit clients of institutional investors.
SEBI defines such activities as ‘Stewardship Responsibilities’ of the institutional investors. The ‘Stewardship code’ is a principles-based framework to fulfil these responsibilities. The code mandated by SEBI today is based on six principles and would come into effect from April 1, 2020.
Principle 1 - Institutional Investors should formulate a comprehensive policy on the discharge of their stewardship responsibilities, publicly disclose it, review and update it periodically.
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 diligently.
Principle 2 - Institutional investors should have a clear policy on how they manage conflicts of interest and publicly disclose it.
The policy should ensure that the interest of the clients come before the interest of the entity. The policy should also address how matters are handled when the interests of clients or beneficiaries diverge from each other.
Principle 3 - Institutional investors should monitor their investee companies. Among other things, they should monitor company strategy and performance, quality of company management, board, leadership etc.
SEBI stipulates that the investors should identify the levels of monitoring for different investee companies, areas for monitoring, mechanism for monitoring etc. The investors may also specifically identify situations where they do not wish to be actively involved with the investee companies e.g. in case of small investments.
Principle 4 - Institutional investors should have a clear policy on intervention in their investee companies. Institutional investors should also have a clear policy for collaboration with other institutional investors to preserve the interests of the ultimate investors.
Principle 5 - Institutional investors should have a clear policy on voting and disclosure of voting activity. This requires a comprehensive voting policy to be framed by the institutional investors.
It includes details of mechanisms of voting, circumstances in which voting should be (for/against/abstain), disclosure of voting, etc. The voting policy and voting decisions including rationale for decision should also be disclosed to public.
Principle 6 – Institutional investors should report to their clients periodically on how they have fulfilled their stewardship responsibilities.
Different principles can be disclosed with different periodicities. For example, voting may be disclosed on quarterly basis while implementation of conflict of interest policy may be disclosed on an annual basis.
