New SEBI Guideline Makes It Mandatory For Mutual Funds to Cast Vote on Company Resolutions

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SEBI guidelines allow mutual funds to exercise their voting rights in investee companies in the best interest of unitholders. To further improve transparency as well as encourage Mutual Funds/AMCs to diligently exercise their voting rights in the best interest of the unitholders, it has prescribed additional guidelines based on the deliberations made by Mutual Funds Advisory Committee (MFAC)...

With effect from April 01, 2021, mutual funds will have to compulsorily cast their votes in case of following resolutions of the investee company:

a) Corporate governance matters, including changes in the state of incorporation, merger and other corporate restructuring, and anti-takeover provisions

b) Changes to capital structure, including increases and decreases of capital and preferred stock issuances

c) Stock option plans and other management compensation issues

d) Social and corporate responsibility issues

e) Appointment and Removal of Directors

f) Any other issue that may affect the interest of the shareholders in general and interest of the unit-holders in particular

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These guidelines will be applicable on all schemes, including passive investment schemes such as Index Funds, Exchange Traded Funds, etc. For resolutions other than those mentioned in the paragraph above, mutual funds will be required to compulsorily cast votes with effect from April 01, 2022.

Mutual funds can abstain from casting votes only if they do not have any economic interest in the company on the day of voting.

The vote will be cast at Mutual Fund Level. However, in case the Fund Manager/(s) of any specific scheme has strong view against the views of Fund Manager/(s) of the other schemes, the voting at scheme level will be allowed by disclosing the detailed rationale for the same.

Fund Managers will have to submit a declaration on quarterly basis to the Trustees that the votes they cast have not been influenced by any factor other than the best interest of the unitholders. Further, Trustees will have to confirm this in their Half Yearly Trustee Report to SEBI.

How will the move benefit mutual fund investors?

Mutual Funds are among the major players in the equity market where many retail investors park their hard-earned money. Therefore, fund managers are expected to diligently exercise their voting rights in the matters of the investee company, without any bias, to safeguard investors' wealth.

With SEBI introducing this move, fund houses will be encouraged to focus on companies that introduce resolutions in the best interest of various stakeholders. Instead of focusing on the earnings potential of the company, the new guidelines will allow fund managers to adopt a more holistic approach while assessing the company's growth. Fund managers can also ensure better corporate governance of the listed companies by raising objection on matters that could affect investors.

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Investors are becoming more conscious about the environmental, social and governance practices the companies they invest in follow. Hence, by adopting responsible investment practices to ensure sustainable growth, mutual fund houses can reduce instances of risk if companies disregard such practices.

Notably, there have been several past occurrences where investors lost value due to mutual funds' exposure in securities that were suddenly downgraded. Such instances can be avoided in the future if mutual funds actively take part in the company resolution and make their vote count.

PS: The investment practices followed at the fund houses level is an important parameter that determines how efficiently they protect investors' wealth. That is why, we at PersonalFN, give high weightage to qualitative parameters along with quantitative while recommending equity and debt schemes.

If you wish to select worthy mutual fund schemes, I recommend that you subscribe to PersonalFN's unbiased premium research service, FundSelect.

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Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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New SEBI Guideline Makes It Mandatory For Mutual Funds to Cast Vote on Company Resolutions