The Securities and Exchange Board of India (SEBI) on March 5, 2021, made it compulsory for mutual funds to vote on all company resolutions.
Effective from April 1, 2022, the regulator wants all schemes to vote on the resolutions, even if the company’s equity shares are held as passive investments through an index fund or exchange traded fund (ETF).
The fund house can only stay away from voting if it doesn’t have any equity investment in the company on the day of voting
Voting at scheme-level
While till now the votes were made at the fund house-level, now votes can also be cast at scheme-level if the fund manager of the scheme has a different view than the fund house.
For now, mutual funds will have to ensure that they cast votes on the resolutions related to corporate governance matters, changes in capital structure, stock option plans and other management compensation issues, social and corporate responsibility, appointment and removal of directors and any other issue that may affect interests of shareholders and the interests of the unitholders holding units of the mutual fund schemes.
The mutual fund schemes will have to also compulsorily vote on related party transactions. These are transactions that investee companies enter with parent company, subsidiaries or another company from the same business group.
Also read: SEBI proposes concept of accredited investors: Here's what you should know
Fund managers will now have to submit a declaration to the fund house’s trustees every quarter, that the votes cast have not been influenced by any factor “other than the best interest of the unit holders”. The trustees will be required to confirm this in their half-yearly report to SEBI. These regulations will be in force from April 1, 2021.
Mutual funds are required to disclose on their websites and also in their annual reports, on how they voted on the various resolutions proposed by their investee companies.
No clarity on ‘abstain’ vote
Proxy advisory firms say that it is important the regulator clarifies on whether mutual fund can continue to ‘abstain’ from voting.
“Mutual funds, including index funds and ETFs, have a fiduciary responsibility to all unitholders and so must exercise their votes responsibly. When large number of fund houses abstain from voting ‘for’ or ‘against’, it is a dis-service to unitholders, who hold investments in the company through the mutual fund,” said Shiram Subramanian, managing director, InGovern.
Industry sources suggest that mutual funds may still be able to cast ‘abstain’ vote, as the new regulations don’t state anything against it.
“In some cases, the fund house may not have enough information about company resolution, and abstaining might be the appropriate action,” said a fund manager, requesting anonymity.
Over the years, the share of abstain votes have come down. The data from PRIME database shows that such votes were 20.9 percent of total votes cast in financial year 2014-2015. In financial year 2018-2019, this share was down to 12.5 percent.