India to draft rules for institutional investors voting on company matters
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Mumbai: The Financial Stability and Development Council, a body chaired by the Union finance minister, has proposed that a panel of financial regulators be formed to decide rules on how institutional investors should vote on company matters, two people with direct knowledge of the matter said.
The proposed committee, comprising officials of the Securities and Exchange Board of India (Sebi), the Insurance Regulatory Development Authority of India (Irda) and the Pension Fund Regulatory Development Authority, will formulate the so-called stewardship code, a set of guidelines first adopted by the UK’s Financial Reporting Council in 2010.
In the past five years, similar codes have been implemented by other nations to ensure that institutional investors carry out their fiduciary duty towards their investors. Since its implementation in the UK, eight other countries, including Malaysia, Japan and Taiwan, have adopted the code. Singapore and South Korea have set up working groups to develop such a code.
In India, the “stewardship code will include activities such as monitoring and engaging with companies on matters such as strategy, performance, risk, capital structure and corporate governance, remuneration of directors and management,” one of the two people cited above said, requesting anonymity.
The India-UK Financial Partnership delegation accompanying UK Prime Minister Theresa May presented a paper on the approach India can take to develop its own stewardship code to finance minister Arun Jaitley in December.
The proposals included higher disclosure standards for institutional investors such as pension funds, insurance companies and mutual funds, the second person said, also requesting anonymity. The option of abstaining from voting can also be used under certain circumstances.
“This would be a universal set of principles for all categories of investors with certain dispensations (power to draft different rules) for sectoral regulators,” the person said.
To be sure, markets regulator Sebi has already set out some rules for asset management firms and has been nudging them to vote in company resolutions and disclose their policies to exercise such votes. But Sebi’s nudges to mutual funds fall short of a full set of principles.
Pension funds in India do vote on company resolutions but disclosures about them about their voting policies and decisions are missing. Insurance companies, which are the largest domestic institutional investors, have a poor track record on voting. Only Life Insurance Corp. of India (LIC) and a few other insurers vote, and even here, the disclosures leave a lot to be desired.
To combat that, the insurance regulator had invited comments from insurance companies in January to draft such a code. The draft by Irda has principles that are steps ahead of Sebi’s policies. Irda’s draft focuses on having a voting policy, managing conflict of interest, and when insurers should intervene in companies.
India urgently needs a stewardship code, according to Amit Tandon, managing director and founder of proxy advisory firm Institutional Investors Advisory Services (IiAS).
“The thrust of regulations and public norms is pushing companies to embrace best governance practices. But what about investors, who manage your money? At the organizational level, the same regulations apply to them. But in addition, they have a fiduciary duty towards those whose money they manage. How they represent the interests of those whose money they manage is dealt with through a stewardship code,” said Tandon.