22 January 2023

Stewardship Code For Institutional Investors: Advancing Good Corporate Governance

Ahlawat & Associates


Ahlawat & Associates
The Stewardship Code came into force on July 1, 2020, after the ratification of majority of institutional investors in India.
India Corporate/Commercial Law
To print this article, all you need is to be registered or login on


Stewardship is the skill of leading, overseeing, or managing something that has been given under one's responsibility. Institutional investors including Pension Funds ("PF"), Mutual Funds ("MF"), Insurance Companies ("IC"), Asset Management Companies ("AMC"), Investment Advisors ("IA"), etc. are the stewards of the commercial markets. They have a responsibility to use their rights as shareholders of investee companies to make sure that their client's money that is invested in different companies generates profitable returns and the investee company does not mis-manage the money. The Stewardship Code, 2019 ("Stewardship Code") is a framework built on principles that aids institutional investors in carrying out their obligations to safeguard and increase the value of their beneficiaries' interests. The Securities and Exchange Board of India ("SEBI") has ordered mutual funds to vote compulsorily on certain specified issues related to company resolutions in order to further increase transparency.


The Stewardship Code came into force on July 1, 2020, after the ratification of majority of institutional investors in India1. It is essentially the responsibility of institutional investors to carefully invest the funds of their clients in order to generate returns. However, institutional investors also have a duty of care to maintain the corporate governance of the companies in which they have invested. This is a part of their stewardship obligations. Data from the annual general meetings ("AGMs") of the top 10 Nifty-50 businesses over a four-year period is analyzed to analyze the strength of institutional investors' activism motivated by these obligations.

Through circulars dated March 15, 20102 and March 24, 2014, SEBI has already put the principles of voting for MF into practice. These circulars prescribed detailed mandatory requirements for MFs in India to disclose their voting policies and actual voting by MF on various resolutions of investee companies. A proposal to implement stewardship principles in India that was approved by a sub-committee of the Financial Stability and Development Council ("FSDC-SC") was subsequently examined by SEBI, along with the Insurance Regulatory and Development Authority of India ("IRDAI") and the Pension Fund Regulatory and Development Authority ("PFRDA"). In relation to their investment in listed equities, it has now been decided that all MFs and all kinds of Alternative Investment Funds ("AIFs") must adhere to the Stewardship Code.

In India, listed companies are significantly financed by MFs, a major institutional investor. By December 31, 2021, investments made by MFs have increased exponentially to a total of over 38 lakh crore, or almost 14% of market capitalization. The sum of 10 folios represented significant retail investment in listed businesses through MFs.3 As a result, MFs have come to be seen by millions of investors as "pillars of trust" for both their investments and for preserving the value of those investments through involvement in corporate governance processes. While it may be acceptable for household shareholders to concentrate on short-term objectives (financial performance), controlling shareholders and institutional shareholders are expected to concentrate on maintaining performance and value by investee companies by actively participating in their governance.


The Stewardship Code is attached to a SEBI's cover letter to Institutional Investors that makes clear that it only applies to listed equities. Consequently, it does not apply to institutional investor's investments in listed debt.


The Stewardship Code consists of six principles ("Principles"), each of which includes certain guidance. The following are the Principles:


Institutional investors should create a detailed policy for handling their stewardship obligations, make it public, and frequently evaluate and improve it.

Monitoring investee companies' performance (operational, financial, etc.), strategy, corporate governance (including board structure, compensation, etc.), significant environmental, social, and governance ("ESG") opportunities or risks, capital structure, and other issues are all part of the stewardship responsibilities. Such participation could take the form of in-depth discussions with management, participation in board meetings of investee companies, voting at shareholder or board meetings, etc. Every institutional investor should develop a thorough plan for how it will carry out the aforementioned stewardship responsibilities and make that plan publicly available. If any of the operations are outsourced, the policy should provide a method to guarantee that the stewardship obligations are carried out effectively and conscientiously in those circumstances.

Periodically, the policy should be examined and revised, and the current policy should be made available to the public on the entity's website. A training policy for staff members involved in putting the principles into practice is essential and may be included in the policy.


Institutional investors should have a transparent policy in place that outlines how they will handle conflicts of interest when carrying out their stewardship duties.

Institutional investors should create a thorough policy for recognizing and addressing conflicts of interest as part of the aforementioned comprehensive policy. The goal of the policy is to guarantee that the client's or beneficiary's interests come first, not those of the corporation. Additionally, the policy ought to specify what happens when clients' or beneficiaries' interests conflict.

Among other things, the conflict of interest policy must address the following:

A. Recognizing potential circumstances where conflicts of interest might occur. For instance, if the investee companies are the entity's associates.

B. Procedures established by the entity in the event that such conflict of interest circumstances develop, which may, among other things, include:

  • Blanket prohibitions on investments in particular circumstances
  • Having a "Conflict of Interest" Committee that can be consulted about such issues.
  • There should be a clear division between the voting and customer service/sales duties.
  • Policy requiring individuals with real or prospective conflicts of interest in the transaction to step aside from decision-making.
  • Policy requiring individuals with real or prospective conflicts of interest in the transaction to step aside from decision-making.
  • Maintaining minutes of decisions made to resolve such conflicts.

C. Timely evaluation and revision of the policy and disclosures to public.


Institutional investors need to monitor the companies they have invested in.

Institutional investors must constantly keep an eye on the companies in which they have investments, particularly in regards to a number of factors, including the investee company's operational and financial performance, business strategy, corporate governance, board diversity, remuneration, capital structure, related party transactions, opportunities or risks, such as ESG risks, shareholder rights and grievances, etc. Institutional Investors should implement suitable degrees of monitoring for various investee companies, with the level and degree of monitoring varying according to the type of Investee Company. Compared to enterprises where the amount invested is negligible in terms of the Institutional Investor's assets under management, companies with greater investments may require higher levels of supervision.

According to the Stewardship Code, investors may also specify circumstances in which they specifically do not want to be actively involved with the investee companies, such as in the case of minor investments. What qualifies as a small investment has been left up to the institutional investors' judgment.

When asking investee companies for information for monitoring purposes, institutional investors should also keep insider trading laws in mind. Institutional investors must have a policy for monitoring their investee company that outlines the regions to be watched, the procedures to be followed, and other important information. The monitoring policy should specify the circumstances that could lead to the disclosure of insider information and the steps taken to guarantee that insider trading laws are followed in such circumstances.


Institutional investors need to be very explicit about when they will intervene in the companies they invest in. To protect the interests of the final investors, institutional investors should also have a transparent policy for working with other institutional investors when necessary. This policy should be made public.

The conditions for active engagement in the investee companies and the method of such intervention should be clearly defined by institutional investors' policies. The policy should also include a regular evaluation of the results of such an action. If the situation calls for it, intervention should be taken into account even when a passive investment policy is implemented or when the amount of investment is low. Poor financial performance of the company, corporate governance-related practices, remuneration, strategy, ESG concerns, leadership challenges, litigation, etc. are just a few examples of situations when assistance may be necessary.

The mechanisms for intervention might be meetings/discussions with management for an amicable resolution of the issue and meetings with the boards in the event that it escalates, working with other investors, objecting to decisions, etc.

Different degrees of intervention and situations that call for escalation may be identified and disclosed. Interaction with the companies through institutional investor associations may also be part of this. In some situations, a committee may be established to decide which technique to use, how to escalate the situation, etc.


Institutional investors ought to have a transparent voting and disclosure policy.

It is crucial that institutional investors make their own voting decisions in the investee company after thorough analysis rather than simply supporting the management decisions in order to protect and enhance the wealth of the clients/beneficiaries and to improve governance of the investee companies. This calls on institutional investors to develop a thorough voting policy that includes information on voting, mechanisms under which votes should be cast in favor of, against, or abstained from, voting disclosure, etc. The voting procedure, voting decisions (including the reasoning behind them), the use of proxy voting/voting advisory services, etc., should all be made public.

Voting policy shall include:

  • The voting policy shall include method to be used for voting (e.g. E-voting, physically attending meetings, voting through proxy, etc.). Guidelines should be there on how to evaluate the proposals and take decision and how to vote on particular
  • Formation of oversight committee as an escalation mechanism at some instances. Use of policy of proxy advisors for conflict of interest matters in the circumstance of voting.

Disclosure of voting includes periodicity of disclosure, particulars of actual voting for every proposed resolution in investee companies, basis for voting, method of disclosure (e.g. in annual report to investors, quarterly basis on website etc). In case of use of proxy voting or other voting advisory services, disclosures on scope of services, details of service providers and extent to which the investors rely upon such services.


Institutional investors should report their stewardship activities periodically.

Institutional investors are required to provide regular, simple-to-understand reports to their clients and beneficiaries, on how they have carried out their stewardship obligations in accordance with their policy. It should be noted that adhering to the aforementioned criteria does not obligate an institutional investor to manage a company's operations or prevent them from selling a holding when doing so is in their customers' or beneficiaries' best interests.

Institutional investors shall give details of every principle periodically on their stewardship activities through their website. Different principles can be disclosed at different periods. The report can also be given as a part of annual intimation to its beneficiaries.

Stewardship in the U.K and India: Inconsistencies

India has quickly adopted the Stewardship Code in the manner of the UK without paying much regard to the differences in corporate structures and drivers of good governance practices. In India, the promoters and their families hold the majority of the shares in a concentrated shareholding structure. On the other hand, the UK has a dispersed shareholding structure that enables institutional investors to own significant shares in a company and take part in corporate governance procedures. As institutional investors have such a small holding in India, their voices are seldom ever heard.

The stewardship objectives of India and the UK are also different. According to UK law, the primary goal of fulfilling stewardship obligations is to defend the interests of institutional investors' ultimate beneficiaries, so ensuring their ultimate prosperity and welfare. This is known as the Enhancing Shareholder Value ("ESV") Principle. A similar stewardship model from the UK is not appropriate for India because of its pluralistic corporate structure, which prioritizes the interests of all stakeholders rather than just those of institutional investors' beneficiaries. For instance, Section 166 of the Companies Act, 2013, which places emphasis on the director's fiduciary duties, reflects the regulatory and legislative norms in India, which support a larger and more inclusive business environment. It says that "act in good faith promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment."

Additionally, the Corporate Social Responsibility ("CSR") provisions in the Companies Act, 2013 indicate a strong preference for an inclusive stakeholder strategy that seeks to benefit society rather than just the beneficiaries of institutional investors' money.

The SEBI Stewardship Code has incorrectly placed focus on the benefits of institutional investors to imitate the UK Stewardship regime, without considering the contradictions it would cause in the Indian corporate governance environment.


Under the auspices of an Indian Stewardship Code, effective corporate governance and responsible shareholder involvement should further increase the attractiveness of India's capital markets to both domestic and foreign investors. Through this code, the SEBI aims to create an inclusive stewardship policy for institutional investors that addresses policies for conflict management, training the staff responsible for putting the stewardship code's principles into practice, keeping track of investee companies, interfering in investee companies, working with other institutional investors, and voting. But, the Indian Stewardship Code need to be looked into as means to an end and not an end in itself. In light of this, businesses and investors should now begin seriously considering what they must do to enable and encourage responsible shareholder participation for the benefits of all parties involved.


1. Circular dated December 24, 2019 bearing reference CIR/CFD/CMD 1/168/2019

2. Circular dated March 15, 2010 bearing reference SEBI/IMD/CIR No 18 / 198647 /2010

3. M KRISHNAMOORTHY, VR NARASIMHAN, "Are MFs serious about SEBI's Stewardship Code?", Feb 27, 2022.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More