[Opinion] UK Styled Stewardship Code | Perfect for Indian Corporate Governance?

Ashish Jacob Mathew – [2023] 152 taxmann.com 28 (Article)

Introduction

In the past decade, stewardship has tremendously penetrated in many jurisdictions as soft law measure following the charted path driven through the Stewardship Code in the United Kingdom. Though there are differences in the nature of the stewardship codes, their emphasis revolves around “stewardship” role played by the institutional investors in governance of the investee companies. In some circumstances, the codes have extended its arm to focus on environmental, social and governance matters.

‘Stewardship’ relatively is a new concept for India. Recently, the Indian regulators have taken more concrete steps. The Insurance Regulatory and Development Authority of India (IRDAI) issued a set of guidelines in 2018 on stewardship code for pension funds, and Securities Exchange Board of India issued a stewardship code in 2019 for mutual funds and alternative investment funds (AIFs). In spite of clamorous calls for broader stewardship code from SEBI that encompasses all types of institutional shareholders, none has been yielding. There is a vacuum that can only be addressed through concerted efforts by all sectoral Indian Regulators addressing investor stewardship.

In this background, the article analyses the transposition of the UK styled Stewardship Code to India and also evaluates the soft law instrument of Stewardship as opposed to having a mandatory law, as part of the Companies Act and Regulations in India.

The Myth of Share Holding Structure

In areas such as governance of companies, the UK has given numerous voluntary codes. However, all the codes of corporate governance have evolved in the background dispersed ownership of shares in the UK and influence of institutional investors. On the contrary many countries are generally dominated by the companies with concentrated shareholding and with varying legal systems & institutional structures.

In the UK style Stewardship Code, the dominance of institutional shareholders drives the idea of stewardship. In this premise, the stewardship role played by the institutional investors does have an impact on corporate governance and yields in enhanced returns for corporate investors.

Dispensing with such UK-Style Stewardship code to countries that carry considerably different ownership structures for example, mainly concentrated shareholdings may result incongruous.

Kelttener notes that ‘the chances of a stewardship code increasing ownership behaviour in any jurisdiction will be partly dependent on the structure and legal framework of the local investment market and the power of the different market players’. Similarly, it has been observed that ‘it may very well be the case that the true intention behind adopting a stewardship code in a jurisdiction could be highly contextual and contingent upon jurisdiction-specific factors’.

It is brought to understanding that UK style Stewardship Code emerged from the shadow of agency problems between management and shareholders, it is still clouted to what extent, such a measure is suitable address the agency problems between controller and the minority shareholders in jurisdictions such as India where concentrated shareholding is the norm.

Over the years with rise of shareholder activism and advocacy of stewardship efforts in India, the role of institutional investors has not changed much considering the role played by the controlling shareholders play in listed companies. Therefore, to those extents the Indian context is different from in the case of UK.

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