Here are some extracts:
i. The issue of the role of Mutual Funds in Corporate Governance of listed companies was considered by the Mutual Fund Advisory Committee. It was felt that mutual funds should play an active role in ensuring better corporate governance of listed companies.In addition, mutual funds are required to disclose on their website as well as in their annual report the actual exercise of votes as general meetings of their portfolio companies on certain specified matters. The circular even prescribes a format for this purpose.
ii. It has been decided that henceforth, [asset management companies (AMCs)] shall disclose their general policies and procedures for exercising the voting rights in respect of shares held by them on the website of the respective AMC as well as in the annual report distributed to the unit holders from the financial year 2010-11.
By imposing mandatory disclosure obligations and thereby enhancing transparency, this compels mutual funds to take a more active and considered role while exercising their voting rights on companies. It may no longer be possible for mutual funds to either abstain from voting or to grant proxies in favour of managements or promoters without following a reasoned decision-making process. This is particularly relevant because institutional investors such as mutual funds possess significant shareholding (at least in the aggregate, if not individually) with the power to tip the scales on key voting matters such as merger, change in control, preferential allotment of securities and the like.
Another aspect which is noteworthy is that one of the items which require disclosure of exercise of voting rights pertains to “social and corporate responsibility issues”. Coming a few months after the issuance of the Corporate Social Responsibility Voluntary Guidelines issued by the Ministry of Corporate Affairs, this represents an emerging trend whereby regulators and policy-makers in India are being increasingly sensitised towards matters of corporate social responsibility (CSR), socially responsible investing (SRI) and ethical investing. Naysayers may claim this is nothing but rhetoric; nevertheless, it will require mutual funds to disclose their policies and voting patterns on these matters that will compel such institutions to sit up and take note of these issues.
While the circular applies from a purely legal standpoint only to mutual funds, its broader message could well pave the way for greater shareholder activism in India led by institutional investors.