The code will come into effect from 1 April 2020.
The code will come into effect from 1 April 2020.

Sebi brings mutual funds, AIFs under stewardship code

  • The stewardship code lays down that institutional investors should monitor investee companies and intervene in these companies when required

The Securities and Exchange Board of India on Tuesday brought asset management companies (AMCs) and alternative investment funds (AIFs) under its stewardship code. The code requires intermediaries such as AMCs and AIFs to monitor their investee companies, establish voting policies and avoid conflicts of interest. The code will come into effect from 1 April 2020.

The stewardship code has a few broad principles. It lays down that institutional investors should monitor investee companies and intervene in these companies when required through meetings with the management or through the umbrella of industry body, AMFI. They should have a policy on voting and disclose their voting behavior. Finally, they should also avoid conflicts of interest in their stewardship activities. Such investors should also formulate and disclose their stewardship policy to the public.

Sivananth Ramachandran, director for capital markets at the CFA Institute, explained why this measure was necessary. “AMCs and AIFs capture a small portion of gains from stewardship activities as intermediaries. If the company value is expected to increase by 1% from stewardship activities and funds charge 1% as fees, they end up capturing only 0.01% of gains," he said.

“There can also be conflicts of interest when asset managers compete to manage corporate treasury or pension assets, in the companies in which they invest," he added.

Experts have been cautious in their response to the circular. “It’s a start but we need to see if AMCs and AIFs adopt the stewardship code in spirit," said Shriram Subramanian, managing director, InGovern Research Services, a corporate governance advisory firm. “AMCs have been required to disclose their voting record since 2010, so this is just another step up on that," he added.

However, Suresh Sadgopan, founder of Ladder 7 Financial Advisories, said that the new circular will better protect ultimate mutual fund investors (unit holders) who are typically minority investors in companies.

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