Stewardship codes in India

Mutual funds, insurers and pension funds own large stakes in Indian companies on behalf of millions of savers. Stewardship means using that ownership responsibly: watching how companies are run, talking to management, voting with care and stepping in when things go wrong.

Without stewardship, institutional investors can behave like passive passengers, selling when they are unhappy rather than trying to fix problems. Stewardship codes push them to act more like owners.

For analysts, stewardship matters in two ways. Institutions are often the only shareholders large enough to challenge a promoter. And their voting records, which must be published, show which companies they are worried about.

SEBI's stewardship code

SEBI issued a stewardship code for all mutual funds and all categories of alternative investment funds on 24 December 2019, covering their investments in listed equities. It came into effect in 2020. Each fund house must have, publish and regularly update policies on six principles:

1. Stewardship policy: how it will monitor and engage with investee companies on performance, strategy, governance and material ESG issues
2. Conflicts of interest: how it identifies and manages conflicts, for example when an investee company belongs to the fund house's own group
3. Monitoring: how it tracks investee companies, scaled to the size of its investment, including strategy, management quality, governance and risks
4. Intervention: when and how it steps in, from talks with management to board engagement, joint action with other investors and voting against resolutions
5. Voting: its voting policy and the periodic disclosure of how it voted on each resolution
6. Collaboration: how it works with other institutional investors where needed

Funds must also report periodically to their investors on how they have met these responsibilities.

Other Indian codes

• Insurers: IRDAI introduced a stewardship code for insurance companies in 2017
• Pension funds: PFRDA issued a stewardship code for pension funds in 2018

Voting disclosures

Mutual funds must publish how they voted on every resolution of every company they hold, along with the reasons. These reports are on each fund house's website and are a useful source for analysts.

The usual escalation path

1. Private discussion with management
2. Meeting the board or independent directors
3. Joining with other investors
4. Voting against resolutions
5. Public statements or requisitioning a meeting
6. Selling the investment