With mutual funds (“MFs”)/ alternative investment fund (“AIF”) investments again coming under the SEBI scanner in 2019, SEBI has revisited its norms for protection of mutual fund/ AIF investors. The recent SEBI stewardship code, dated December 24, 2019 (“Code”), and effective from April 1, 2020 is a step in this regard. Requirements are applicable to MFs/ AIFs (“Institutional Investors”) investing in listed equities.

Key Aspects

· Institutional Investors now mandated to put in place policies on ‘discharge of stewardship responsibilities’ which are to be publicly disclosed and periodically reviewed/ updated.

· Indicative parameters of stewardship responsibilities set out however, flexibility granted to funds on the contours to be adopted.

· Parameters include monitoring of the listed company’s performance (operational, financial, etc.), strategy, corporate governance (including board structure, remuneration, etc.), material environmental, social, and governance (ESG) opportunities or risks, capital structure, etc.

· Setting up of a specific committee to which matters of potential ‘conflict of interest’ may be referred to in cases of conflicts with listed equities. Additionally, Institutional Investors will be required to segregate the voting function with the client relations/ sales function.

· Additional policies to for Institutional Investors to implement are: (i) intervention in investee companies, (ii) collaboration with other Institutional Investors, and (iii) voting and disclosure of voting activities.

· Disclosure/ Periodic Reporting of ‘stewardship activities’ prescribed, including placing periodic reports on the Institutional Investor’s website and making disclosures in the annual intimations to the clients.

Observations:

‘Stewardship Principles’ aren’t new in the Institutional Investor space. MFs have been previously mandated to disclose details of votes cast (including rationale) and obtain audit certifications on the voting reports. The Code takes the next step in setting out criteria to be kept in mind by MFs while continuing with existing practices. Further, the principles have been extended to voting practices of AIFs as well.

The Code does not clarify if its applicability extends to investments by Institutional Investors in listed debt. Existing requirements for MFs cover obligations qua voting rights in ‘listed companies’ as opposed to ‘listed equities’. Whilst the Code does not repeal existing obligations on MFs, clarity from SEBI is awaited on whether AIFs investing in debt need to apply the ‘stewardship principles’ to their listed debt investments as well.

Policies on collaboration with other Institutional Investors appears to be a step of SEBI requiring Institutional Investors to set out specific parameters while entering into voting arrangements with other investors. This is a new requirement which would have a direct impact on inter alia on MFs engaging in ‘loan against shares’ activities, wherein MFs enter into consortium/ lender arrangements to allow defaulting listed borrowers inter alia extensions to repay their debts. Institutional Investors would have to consider the implications significantly to ensure that the policies do not appear to be a ‘one size fits all’ approach.

Whilst the Code was supposed to be effective from April 1, 2020, SEBI has extended the applicability requirements to July 1, 2020 in light of the relaxations granted on account of the Covid-19 pandemic. Therefore, Institutional Investors may get a little more time to consider internal changes to be made.

Authors:
Aditya Alok, Senior Associate
Karthik Koragal, Associate