Mutual fund houses see red as Sebi asks them to monitor listed companies

Mutual funds, AIFs may need to report corporate governance issues in firms they invest in.

A proposed code asking fund managers to monitor corporate governance issues in the companies that they invest in has raised concern among several mutual and alternative investment funds (AIFs), which have flagged the move as one that will increase their compliance burden. The Securities and Exchange Board of India (Sebi) put out a circular on December 24 asking mutual funds and all categories of AIFs to “shoulder greater responsibility” by monitoring their investee companies from April 1.

To be sure, the Stewardship Code, as it is known, is only a draft proposal at this stage, which Sebi and the Pension Fund Regulatory and Development Authority — the regulator for some categories of funds — both want introduced quickly. Under the code, fund managers will have to monitor and intervene if they see red flags in financial performance, corporate governance-related practices, remuneration, strategy, environment, social and governance risks, leadership issues and potential litigation at the company.

The issue was brought before Sebi officials recently at a closed door meeting involving fund managers as well as bankers.

“We are investors, not some investigating agency,” a person present at the meeting is believed to have told the Sebi members present. Another person who was at the meeting told ET, “In some cases, AIFs only have two to four people stationed in India. They won’t be able to monitor the companies the way Sebi wants them.” However, according to people in the know about Sebi’s thinking, the market regulator’s rationale in proposing the Code was to bring in transparency, as some fund houses have not been fully upfront about benchmarking and fee distribution. Under the proposed code, every institutional investor is required to formulate a comprehensive policy on how they would discharge their stewardship responsibilities and publicly disclose it.

This, people in the know of the matter said, is expected to bring in greater transparency. Fund managers are, however, unhappy about the ambit of the proposed code. “The areas which require monitoring are quite encompassing and it would need be reported in an easy-to-understand manner on the Sebi website and shared with clients/ beneficiaries annually,” said Rajesh H Gandhi, partner, Deloitte India.

“The investments made by mutual funds and Category III AIFs in listed companies can be huge and this would pose a challenge to the institutional investors to implement the monitoring mechanism,” he added. Investors also say they cannot be expected to track all the companies that they invest in. “We invest in thousands of firms during the year, and it’s impossible to monitor each one of them,” said a senior executive at a mutual fund.
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