Indian regulator proposes six-point governance guidance for institutional investors

Consultation on what amounts to a ‘stewardship code’

The Indian securities market regulator is consulting on what is, in effect, the latest ‘stewardship code’ for institutional investors.

The Securities and Exchange Board of India (SEBI) has put forward six-point guidance for investors covering issues such as voting disclosure, conflicts of interest and short-termism as part of a wider consultation on corporate governance.

“The effectiveness and credibility of the entire corporate governance system and the company oversight to a large extent depends on the institutional investors who are expected to make informed use of their shareholders’ rights and effectively exercise their ownership functions in companies in which they invest,” SEBI says.

“Increased monitoring of Indian listed corporations by institutional investors will drive the former to enhance their corporate governance practices, and ultimately their ability to generate better financial results and growth for their investors.”

The guidance, which mirrors existing codes of investor behaviour although it doesn’t explicitly use the term ‘stewardship’, kicks off by saying that institutional investors should have a clear policy on voting and disclosure of voting: “Institutional investors should seek to vote on all shares held. They should not automatically support the board.”SEBI also asserts that investors’ duty is to act in the interests of all clients and/or beneficiaries when considering engagement with company management and voting their shares.

“The effectiveness and credibility of the entire corporate governance system depends on institutional investors”

The regulator says investors should also monitor their investee companies to see when it is necessary to enter dialogue with their boards – and that they should be willing to act collectively with other investors where appropriate.

There should also be clear guidelines “on when and how they will escalate their activities as a method of protecting and enhancing shareholder value”. And investors should also report periodically on their responsibilities and voting activities: “Such reports may comprise of qualitative as well as quantitative information.”

SEBI is seeking comments on the 54-page ‘Consultative Paper on Review of Corporate Governance Norms in India’ by the end of the month. Link