The Securities and Exchange Board of India
(Sebi) has made a significant and interesting inroad into improving corporate governance by stipulating a stewardship code for the mutual fund industry and alternative investment funds. Essentially, a principles-based law (not a prescriptive set of rules), the code takes effect from April 1.
The framework is the first statutory recognition that a space exists for interaction between institutional investors
and those involved in corporate governance — a space that has been increasingly shrinking because of fear of insider trading allegations. This is a truthful approach and an important departure from pretending that there is no need for such an interaction at all. Put differently, this space for interaction, now recognised under the stewardship code, would enable institutional investors
to engage with corporate boards, without diluting the requirement of corporates to handle their communications with the external world in a fair, transparent and a need-to-know basis.
One of the principles for stewardship stipulated by the Sebi
is that institutional investors
must “monitor” the investee companies. Indeed, listed companies and their insiders would need to comply with regulations prohibiting insider trading. They are required to have communication policies and materiality policies so that the world at large is aware of their approach to what is considered material by them and how they would handle communication of information to the world at large.
The clash of the approach between the two — institutional investors on the one hand and corporate management on the other — would lead to the requisite tension that would make directors on corporate boards conscious of their need to be mindful of the seriousness of their role in governance of the companies they preside over.
Another principle provides that institutional investors must have a policy on their “interventions”, their approach to voting, and must collaborate with other institutional investors. The voting policy of institutional investors would bring in transparency about the approach of the institutional investors. It may be perfectly alright for a mutual fund, for example, to adopt a policy that if it is dissatisfied with a proposal from an investee company, it would not spend time voting for or against, but may well consider a sale of the investment — in other words, vote with its feet. This would, in turn, give a signal to those involved in governance of the investee companies that they might be faced with a situation of an investor selling off shares or an investor voting against — now the size of the investor and its approach to how aggressive it would be, would be a pointer to the corporate on how to handle the risk of the intervention by the investor.
While a regulatory stipulation for doing the right thing is not a good approach, given the sheer lack of efficacy of rule-based law in India for achieving the objective of good governance, the attempt with a principles-based stewardship code must be given a chance to see how it delivers on the objective of good governance. Most matters of corporate governance are handled rather lightly with a heavy burden of form and light burden of substance.
The sense of entitlement of the promoter-shareholder is so deeply entrenched socially that it seeps into judicial attitude as well. The absence of a robust tort regime, crippled as it is by an under-resourced judiciary, has led to jurisprudence too having stagnated. Efforts by successive governments of all political colour to undermine the judiciary without proper support in terms of infrastructure, manpower and systems to that the executive arm of the state is not lightly interfered with, has had the same effect for the executive branch of corporate India too. Even today, when one speaks of institutional intervention in a corporate, lawyers would hark back to a discussion of the Supreme Court in LIC v/s Escorts, delivered in the 1980s, a totally different era with far less complexity of stakeholder interests in listed companies.
Of course, the stewardship code is not a panacea at all. One can already see how it is enforced against institutional investors, who breach the principles, would pose problems. The Sebi
would do well to let the code run its course and use its oversight to have discussions with the industry on how the code fares instead of treating it as another rule-based law to be enforced with penal sanctions. It would be easy to game this code into another checklist to be ticked off without letting its objectives being achieved. An approach of being more circumspect than is the norm, would lead to better prospects for its objectives.
The author is an advocate and an independent counsel. Tweets@SomasekharS