MUMBAI: It has reported that capital markets regulator, SEBI, is urging its counterpart in the insurance sector to encourage insurers to become more vocal on issues of corporate governance. Insurance companies hold significant stakes in listed Indian entities, with LIC, the largest, alone managing assets over Rs 13 lakh crore.
“The Securities and Exchange Board of India has approached us to improve corporate governance practice in companies and the need for insurance companies to play an active role towards it. We are looking into the matter,” said a senior official of the Insurance Regulatory and Development Authority (IRDA).
Sebi is pressing the insurance regulator to come up with norms on improving corporate governance in listed companies, similar to the new rules governing the voting record for mutual funds, said the IRDA official. Asset management companies, which run mutual funds, now have to disclose the voting record for their portfolio companies. Sebi has also asked fund houses to apply their mind rather than abstain or blindly back the promoter of a company.
A Sebi official said institutional investors should act collectively and make reasoned judgements as that would minimise any loss of shareholder value. He said institutional investors investing in equities should become more active in exercising their ownership rights without coercion. Sebi’s initiative comes in the backdrop of increased desire among regulators that institutional investors should collaborate to ensure better corporate governance in listed firms. In particular, these investors should ask the promoters more questions, thereby becoming a voice for small investors.
“India is a country where promoters hold a big sway, and it is important for small investors to have a voice. Institutional investors must lend their voice to small shareholders or act as counter-voices to promoters,” Sebi Chairman UK Sinha said recently.
Institutional investors play passive role
Compared to developed nations, institutional investors often play a passive role in India. In the West, investors are known to voice their opinion. They also stall major corporate moves if the proposed action appears wrong. Besides, regulators such as the US Securities & Exchange Commission mandate that institutional investors disclose their voting record.
Shriram Subramanian, founder and managing director of InGovern Research Services, India’s first proxy advisory and corporate governance research firm, feels institutional investors have a fiduciary responsibility to unit-holders to actively monitor their investments and demand higher corporate governance standards in investee companies. In the process, the institutional investors will also contribute to increasing the depth and breadth of local capital markets.
The scenario, however, has started changing in India. In 2011, institutional shareholders questioned Crompton Greaves’ decision to buy an aircraft when the company’s profits were under pressure. And Satyam’s purchase of group firm Maytas Infrastructure had to be aborted because of opposition from institutional shareholders, leading to the eventual unraveling of the software services company. But such instances have been few and far between.
Even though the market regulator requires asset management companies to indulge in shareholder activism, most fund houses have been shying away from voting on corporate resolutions on behalf of large investors whose money they manage. In FY12, mutual funds abstained from 48% of proposals and the opposing votes were less than 1%.
“Corporate governance is not just about raising voice against event-based proposals, but also about routine developments such as the appointment of a director or an auditor. Institutional investors should have detailed voting policy norms,” Shriram added.
Insurance companies are large stakeholders in companies. For instance, they hold a big block of shares in companies such as Larsen & Toubro and ICICI Bank. Interestingly, LIC’s assets under management of over 13 lakh crore far exceed other domestic institutions. But the country’s largest life insurer is seen as a passive investor. In FY13, it had bought stocks worth 17,630.39 crore, including shares of state-run units, in which the government had partly divested its stake.