Enhanced Disclosure of Mutual Fund Voting Policies

shareholders of a company may exercise their voting rights in any manner in
which they deem fit. They are not even obliged to exercise their corporate
franchise and may instead choose to abstain rom attending and voting at company
meetings. This legal position may engender passivity and shareholder apathy,
which have been prevalent in Indian companies for several decades.
While law or
regulation cannot compel shareholders to exercise their votes on companies,
they can be exhorted to do so. In this vein, SEBI in 2010 required mutual funds
(which subject to registration with SEBI) to disclose their voting policies. By
introducing transparency in mutual fund voting, the idea is that such investors
cannot simply adopt a passive attitude and must decide whether or not to vote
and, if so, how.
In a more recent
development, SEBI has issued a circular
making the disclosure of mutual fund voting policies more stringent. The key
matters encompassed in the circular are as follows:
1. Asset management companies (AMCs) must record and disclose
specific rationale supporting their voting decision (for, against or abstain)
with respect to each vote proposal.
2. AMCs must publish summary of the votes cast across all its
investee companies and its break-up in terms of total number of votes cast in favor,
against or abstained from.
3. AMCs must make disclosure of votes cast on their website (in
spreadsheet format) on a quarterly basis, within 10 working days from the end
of the quarter. Further, AMCs shall continue disclosing voting details in their
annual report. A revised format for disclosure has been prescribed.
4. Further, on an annual basis, AMCs must obtain Auditor’s
certification on the voting reports being disclosed by them. Such auditor’s
certification shall be submitted to trustees and also disclosed in the relevant
portion of the Mutual Funds’ annual report & website.
5. Board of AMCs and Trustees of Mutual Funds shall be required to
review and ensure that AMCs have voted on important decisions that may affect
the interest of investors and the rationale recorded for vote decision is
prudent and adequate. The confirmation to the same, along with any adverse
comments made by auditors, shall have to be reported to SEBI in the half yearly
trustee reports.
These measures
will certainly enhance more responsible exercise of voting rights by mutual
funds. In fact, SEBI’s circular explicitly states that mutual funds/ AMCs must
be encouraged “to diligently exercise their voting rights in the best interest
of the unitholders”. This is representative of the dual agency problem
prevalent in the case of institutional investors. On the one hand, the investee
company managers ought to manage their companies for the benefit of their
shareholders. Where a shareholder is an institutional investor (as in the case
of a mutual fund), such investor must in turn manage its investment for the
benefit of the unitholders who are the ultimate investors. This explicit
recognition of unitholders’ best interest imposes a significant onus on AMCs
and their managers to act cautiously and responsibly in exercising voting
rights on investee companies, and it is not longer possible to adopt a passive
attitude when it comes to corporate voting.

Such responsible
voting decisions would also enhance activism among institutional shareholders,
a phenomenon that has become altogether real in the Indian context. Although
SEBI’s circular applies directly only to mutual funds, the attitude adopted by
mutual funds may also influence other institutional investors as to the manner
of their exercise of the corporate franchise. The rapid development of the
proxy advisory industry has already begun to further aid institutional activity
in corporate meetings and voting.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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