Dec 30, 2019

SEBI – Stewardship Code for Mutual Funds and AIFs

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In order to improve corporate governance in relation to the investment in listed equities by institutional investors and give a greater boost to the protection of the interest of investors in such companies, the Securities and Exchange Board of India (“SEBI”), has decided to bring ‘Stewardship Code’ on institutional investors i.e. Mutual Funds (“MFs”) and all categories of Alternative Investment Funds (“AIFs”) vide circular dated December 24, 2019.

Stewardship in general parlance refers to the management and organization by a person. Since, MFs and AIFs manage the collectively pooled money of investors, SEBI has decided to incorporate Stewardship code, in order to highlight the responsibilities, principles, ethical code needed to be followed by MFs/AIFs as their role of manager of the pooled resources of the investors.

Key highlights of the Stewardship Code

  • Effective from Financial Year beginning April 01, 2020.
  • 6 (Six) policies have to be formulated by the AIFs/MFs, which need to be periodically updated and publicly made available for all investors.
  • AIFs/MFs also need to report to their clients/ beneficiaries periodically on how they have fulfilled their stewardship responsibilities as per their policy in an easy-to-understand format.
  • The following policies need to be made by AIFs/MFs as per the Stewardship Code:
    1. Policy on the discharge of stewardship responsibilities
      • Stewardship responsibilities to include:
        • Monitoring and actively engaging with investee companies on various matters including performance (operational, financial, etc.);
        • Strategy;
        • Corporate governance (including board structure, remuneration, etc.);
        • Material Environmental, Social, and Governance (ESG) opportunities.
      • The policy to contain how the AIF/MF intends to fulfil the aforesaid stewardship responsibilities. 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.
    2. Policy on managing conflicts of interest
      • Identify possible situations where conflict of interest may arise e.g. in case of investee companies being associates of the entity.
      • Set in place procedures in case such conflict of interest situations arise which may, inter alia, include:
        • Blanket bans on investments in certain cases;
        • Having a ‘Conflict of Interest’ Committee to which such matters may be referred to;
        • Clear segregation of voting function and client relations/ sales functions;
        • Policy for persons to recusal;
        • Maintenance of records of minutes of decisions taken to address such conflicts.
    3. Policy on continuous monitoring of their investee companies
      • The policy on monitoring, inter-alia, to include the following:
        • Different levels of monitoring in different investee companies. E.g. companies where larger investments are made may involve higher levels of monitoring vis-à-vis companies where amount invested in insignificant from the point of view of its assets under management.
        • Areas of monitoring which shall, inter-alia, include:
          1. Company strategy and performance – operational, financial etc.
          2. Industry-level monitoring and possible impact on the investee companies.
          3. Quality of company management, board, leadership etc.
          4. Corporate governance including remuneration, structure of the board (including board diversity, independent directors etc.) related party transactions, etc.
          5. Risks, including Environmental, Social and Governance (ESG) risks
          6. Shareholder rights, their grievances etc.
        • Identification of situations which may trigger communication of insider information and the procedures adopted to ensure insider trading regulations are complied with in such cases
    4. Policy for intervention in the investee companies
      • Circumstances for intervention may, inter alia, include poor financial performance of the company, Corporate Governance related practices, remuneration etc.
      • The mechanisms for intervention including:
        • meetings/discussions with the management for constructive resolution of the issue;
        • In case of escalation thereof, meetings with the boards, collaboration with other investors, voting against decisions, etc.
      • A committee may also be formed to consider which mechanism to be opted, escalation of matters, etc. in specific cases.
    5. Policy on voting and disclosure of voting activity
      • The voting policy shall, inter-alia, include the following:
        • Mechanisms to be used for voting (e.g. e-voting, physically attending meetings, voting through proxy, etc.)
        • Internal mechanisms for voting including, guidelines on how to assess the proposals and take decision thereon, guidelines on how to vote on certain specific matters/ circumstances including list of such possible matters/circumstances and factors to be considered for a decision to vote for/ against/ abstain etc.
        • Disclosure of voting including, periodicity of disclosure, details of actual voting for every proposed resolution in investee companies etc.
        • In case of use of proxy voting or other voting advisory services, disclosures on scope of such services, details of service providers etc.
    6. Policy on collaboration with other Institutional Investors
      • The Institutional investors also have to form a policy for collaboration with other institutional investors where required, to preserve the interests of the ultimate investors.

Stewardship obligations have been around for some time now in the international capital markets scenario, with United Kingdom being the first to recognize stewardship obligations in the year 2010. Many other jurisdictions like Japan, South Korea and Malaysia have then followed the suit, coming up with their own stewardship codes.

The role of stewardship obligations has increased over the period of last few years with increased institutional investors ownership of various companies. Further, a major chunk of the public funds is directly or indirectly under the supervision of these institutional investors, which makes the introduction of stewardship obligations very relevant in terms of protection of the investors. Thus, this move by SEBI will particularly benefit the investors in taking their own voting decisions in the investee company after in-depth analysis rather than blindly supporting the management decisions.

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