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SEBI seeks active role
November, 17th 2009

Domestic mutual funds may soon find themselves playing a bigger role in public shareholder activism. In its attempts to get this dominant shareholder group to question actions of companies that are against non-promoter stakeholder interests, the capital market regulator, the Securities and Exchange Board of India (Sebi), has asked mutual funds to come together to question errant companies in such instances.

Sebi wants fund houses to play an active role in ensuring superior corporate governance of public listed companies in order to restore faith and protect the interest of investors, said a person, who attended the meeting on Friday, involving Sebi, ICAI, officials from fund houses and investor associations.

The regulator wants fund houses to co-operate and share information among themselves for enhancing transparency, said another person who was part of the meeting, which was attended by Sebi chairman CB Bhave.

The market regulator may also ask fund houses to disclose about their participation and voting to the public. This is similar to a rule by the US Securities and Exchange Commission (SEC), which mandates mutual funds there to disclose their proxy voting record.

These proposals come against the backdrop of a handful of instances where it was felt that the influential public shareholders were not questioning the actions of company managements.

Sebi, at the meeting, expressed its concerns over fund houses not actively exercising their voting rights at shareholder meetings. Mostly, fund houses instruct their custodians (they provide proxy voting services) to go and execute their decision on a particular issue. Once the custodians exercise proxy voting, they just confirm the same to the fund house.

The role of institutions in shareholder activism is minuscule compared to the developed nations, where these stakeholders have even blocked mega merger on grounds that the proposed move was not in their best interests. In India, the impact of shareholder activism was seen at its best in a recent case, where institutional investors scuttled an attempt by the Satyam management to acquire promoter-controlled Maytas Infrastructure.

Mutual fund officials, however, claim a handful of them are prompt in questioning controversial moves, but fewer instances are publicly discussed. Many of them (mutual funds) dont raise a hue and cry because of the live and let live attitude. In select cases, where the mutual funds are owned by banks, they are forced to maintain silence on insistence of the parent, as the erring company could be a client, said a senior fund manager with a private mutual fund.

Besides, Sebi plans to appoint a committee to examine if service tax in mutual fund transactions should be borne by investors or mutual funds. While the market regulator doesnt want investors to bear additional costs, industry body Amfi has been lobbying that service tax should be separately charged to unitholders, as they are the beneficiaries of the service.

Sebi is also examining the issue of the number of investors that every mutual fund scheme should have, to mitigate risks in case of a huge exodus. The regulator plans to increase the minimum number of investors in a scheme to 50, while reduce a single investor holding to 10-15% from 25% of the assets under management. It plans to extend this structure to a schemes sub-plan level (institutional and retail).

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