BackGood governance linked to active participation of MFs
Mutual funds taking part actively in AGMs will enhance value of firms by improving governance, says report
Premium(Although mutual funds have adopted a framework to vote and publish their voting pattern annually, their participation in the actual voting is still low.)
New Delhi: Mutual funds need to participate more actively in annual general meetings (AGMs) and end their traditional passivity, according to Mumbai-based activist shareholder advisory firm Stakeholder’s Empowerment Services (SES).
Such participation will enhance the value of the firms they invest in by improving governance, said the SES report that was released on Friday.
Despite the value of the economic right of a vote being nearly equal to that of its political right, institutional investors are reluctant to exercise this, it said.
“We believe that valuation is intertwined with good corporate governance practice. Stakeholders of the company should ensure good governance by participating actively, which would, in turn, help in long-term value generation of the company and thereby enabling the business to realize its true potential," said the report that was released on Friday.
“Participative approach of all stakeholders in companies where governance is not up to the mark will unlock potentially high intrinsic value of the business by extracting required governance practices from the management," it added.
Data on voting patterns in 2012 AGMs of at least 44 top listed firms collected by SES showed that attendance was low—ranging from a minimum 0.03% to a maximum 3.58%.
“Most fund managers say their relationship with corporates are on many grounds. Besides equity stakes, they subscribe to their debentures or manage funds for them. Due to this, they are unable to force an issue with the management by voting vociferously against it," said Arun Kejriwal, founder, Kejriwal Research and Investment Services, a brokerage. “Another excuse they give is that their holding is not enough to block a resolution. One needs 24% of the votes to block a resolution."
The SES report said the seeming lack of interest was because of several reasons: an apparent lack of awareness; shareholders wanting other shareholders to bear the cost of research and analysis and to follow their lead; asymmetry in information discovery; shareholder apathy to rational decision-making; differences in portfolio performances, and varying investment horizons and objectives of different investors.
The Securities and Exchange Board of India (Sebi) issued guidelines in March 2010 to all mutual funds to enhance their role in all facets of corporate governance of listed firms.
Although mutual funds have adopted a framework to vote and publish their voting pattern annually, their participation in the actual voting is still low.
“Probably the idea that institutional investors can play an important role in governance of a company is yet to sink in fully," the report said.
“An argument prevalent in the industry is that fund managers do not invest in companies with poor corporate governance practices and, therefore, if they find any governance issue(s) in a company, they prefer to exit rather than persist with the company and address those issues. While this approach may be good in short term, it is not good for the industry and capital markets in general," it noted.
A Mumbai-based fund manager for a top-ranking mutual fund admits that funds like his are reluctant to vote, as their primary concern is their own business interest.
“Frankly, we get most of our money from corporates. So when we have a corporate-governance issue, we quietly go and speak with them rather than opposing them publicly," this person said, requesting anonymity. “Advisories should also focus on the voting patterns of insurance companies and pension funds, since they have no direct business interests with such corporates."
Mutual funds typically have no leverage anyway unless they own more than 2.5-3% in a firm, the fund manager said.
Another fund manager, who oversees one of the best-performing funds in India, agreed.
“We typically invest only in good companies," he said on condition of anonymity. “So if there is a problem, we go and talk to them rather than going against them."
“As long as everything is within the law, we remain silent," he said, but if “something is not in conformity with the law, we do speak up".
Equity mutual funds’ average assets under management rose 4% to ₹ 2.12 trillion in the quarter ended 31 December, in line with underlying market movement, according to rating agency Crisil.
“As can be seen from some of the recent outcomes, minority shareholders, if backed by large institutional investors, can force promoters and management to backtrack from their decisions," said Kejriwal.
One recent such instance is UK-based the Children’s International (TCI) Fund taking on Coal India Ltd, the world’s largest coal producer, accusing it of selling the fuel cheaper than market price and hurting shareholder interests. The UK fund holds nearly a 10% stake in the state-run company.
Elsewhere, a group of minority shareholders of Satyam Computer Services Ltd has questioned the valuation process as related to the merger of the latter with parent Tech Mahindra Ltd.
Sebi has made it mandatory for funds to make public their stand on a particular resolution and the reason behind it.
This disclosure will make these funds accountable in the future, Kejriwal said.
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