InvestorQ : What does it mean that SEBI has made it mandatory for mutual funds to vote on company resolutions?
Anu Biswas made post

What does it mean that SEBI has made it mandatory for mutual funds to vote on company resolutions?

Ria Jain answered.
1 month ago

In an interesting shift in the role of institutional investors in corporate governance, SEBI has now made it mandatory for domestic mutual funds registered with SEBI to necessarily vote on resolutions floated by companies where the said fund has an investment interest. This mandatory voting will be effective from April 2021 and to begin with they will have to vote on all important resolutions that are put to vote at the AGM.

Some of the categories of important resolutions defined by SEBI include These include mergers, corporate restructuring, capital structure changes, employee stock option plans, appointment and removal of directors and corporate responsibility issues. This will be valid for a period of 1 year. However, from April 2022, MFs have to mandatorily vote on all resolutions that are put to vote and they cannot rely on proxies alone.

In the last few years, there has surely been an improvement in participation of MFs in the voting process. For example, just about a decade back, mutual funds would abstain from voting in 80-90% of the issues that are put to vote. However, nowadays the mutual funds only abstain in 10% of the cases, which is a huge improvement in any case. SEBI wants MFs to use the expertise of MFs to instil greater degree of corporate governance in markets.

The big issue is whether the voting will be at a fund level or at a scheme level. For example, SEBI has clarified that if any specific fund manager of a particular MF scheme has a strong view against the views of the vote of the fund, then even a scheme level vote can be allowed but that will only be subject to detailed recording of the rationale for the dispute. MFs are material investors in India and they own about 7.5% in NSE listed companies.