India introduces mandatory stewardship principles and disclosures for investors

This contrasts with the ‘comply or explain’ approach commonly used for stewardship codes in other jurisdictions

Starting this month, investors in listed Indian equities will be asked to identify specific circumstances that would trigger active engagement with portfolio companies, develop engagement procedures and report annually on their stewardship performance. 

The sweeping new rules come as India’s new Stewardship Code entered into force on July 1, after a two month delay due to the spread of COVID19.

The Code is based on the UK’s Stewardship Code – a set of seven corporate governance principles for investors, introduced by regulators in the wake of the 2008 financial crisis. Since then, the first-of-its-kind code has been adapted for local use by a number of jurisdictions including the EU, Denmark, Hong Kong, Japan, Kenya, Malaysia, South Africa, Taiwan and Thailand.

Unlike the UK’s principles-based approach which gives investors the freedom to determine their own policies, market regulator the Securities and Exchange Board of India (SEBI) has set out technical criteria for policies which comply with its Stewardship Code.

These include requirements for investors to formally identify “circumstances for active intervention in investee companies and the manner of such intervention” such as engaging senior management, escalation to board level and shareholder votes. Interventions should be considered even for passive investments or for marginal investments, the Code clarifies.

Investors must also develop comprehensive voting policies, which include “guidelines on how to vote on certain specific matters”, and disclose their voting records publicly. 

Reporting expectations for investors under the Indian Stewardship Code consist of periodic disclosures to clients or beneficiaries on their performance against each of the Code’s six principles.

SEBI has designated the Stewardship Code as mandatory, although no penalties have been introduced for non-compliance. This contrasts with stewardship codes in other jurisdictions which commonly take a ‘comply or explain’ approach.

The Code will apply to asset managers, mutual funds and alternative investment funds investing in listed Indian companies. Investors in fixed income, private equity and real estate are exempted from the Code’s scope.

Commenting on the Code’s release, Manish Jain, Co-Founder of ESG advisory firm Envint, said: “I would be wary of calling it a game-changer at this point in time, but it is absolutely a strong signal from regulators on the direction of responsible investment in the country to nudge corporate behaviour

“Even with the discretion available in the Code on monitoring portfolio companies, there are still a number of issues to achieve compliance. For example, most mutual funds and alternative investment funds have a large number of investments in their portfolios and it will be a challenge to roll-out the mechanism for monitoring.”  

So far, a number of large asset managers have publicly released their stewardship policies as required by the Code, including SBI, Quantum and Invesco.

Prior to the Stewardship Code’s launch, Indian insurers and pension funds observed sector-specific stewardship codes introduced in 2017 and 2018 respectively.