Should MFs outsource voting duties to proxy firms?

Thu, 24 Oct Pre-Open

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The mutual funds (MFs) have large chunk of the country's stock market value under control and thus they exert substantial power over corporate polices. The Securities & Exchange Board of India (SEBI) has always ensured better corporate governance of the listed companies in order to protect investors interest.

Some time back, press reports quoted the SEBI Chairman as saying: "I would urge the asset management industry to get proactive in deciding what they are doing about company resolutions and the governance practices in the companies where they have invested. If institutional investors start taking a lead in this direction, I'm sure a large class of retail investors will benefit substantially from this."

The MFs generally exercise their duties of casting votes at General Meetings and Extra Ordinary General Meetings of corporates. Their votes weigh on variety of issues like how are top executives being paid, electing board of members, decisions pertaining to mergers and acquisition and so on.

But the mutual fund industry has been increasingly adopting the practice of voting through proxies. This means, funds outsource the task of taking decisions for the companies, in which they have invested investors money to proxy advisors. These funds employ the services of proxy advisory firms in order to take care of any voting matters pertaining to the companies they have invested in as a fund.

So, is this type of voting system justified?

In our view, the votes from fund houses are very crucial in order to protect the interests of minority shareholders. And thus voting through proxies might not serve the right purpose. The retail investors put money in mutual funds with trust, that the money will be invested in the right companies. Thus, it becomes fund managers duty to keep a check on the companies' events where the money is invested in the best interests of shareholders.

In fact, various groups of investors have criticized this practice of voting through proxies. The fund managers are paid huge salaries and thus it is their duty to take active role in voting related to critical company matters.

Though SEBI has been making all the attempts to make the voting process in corporates more effective, but little output is fetched so far. Thus it seems the regulator will have to come out with more stringent norms in order to raise bar on this front.