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A letter to the Board Members
June 07, 2020


Dear Board Members,

We are pleased to send this first issue of our letter, ‘Yes, Governance Matters.’ covering the subject ‘Institutional shareholder can no longer be a mute spectator : Stewardship governance in India’.

Today with the advent of PE/VC, class of institutional investors has substantially expanded and so is the level of their responsibility and liability.

As Board Members I can only imagine the kind of pressures you must be enduring, and we stand with you and support your efforts in maneuvering these difficult days.

It is in these times, that we continue to remind ourselves that the time has come for us to develop and implement not only the "Best Practices" but the "Next Practices" in governance. Never before are stakeholders being talked about so seriously than today, especially after the awareness created by Business Roundtable. Purpose and ESG have become a new value drivers and a strategy for fund raising.

Lately we have seen Boards grappling with data privacy, anti-competitive practices, whistleblowers and activist investors, anti-corruption and bribery issues, transfer pricing and related party transactions, diversity and discrimination charges. These have become corporate value drainers.

At a time when companies are looking to remain relevant and also compete at a global level, it is important to ensure that governance in your organization does not constitute a mere 'check the box' compliance, but rather embodies 'real governance' -- the kind that will withstand all weathers.

Recent pandemic has put an increased onus on the board of directors of companies to take care of conflicting interests when resources are short. When revenues are drying, which stakeholder should get priority - Making donations to migrant workers or raising employee compensation, paying taxes on a timely basis, or take care of landlords or the creditors?

Governance is not just the plain letter of the law that is followed but also that its spirit is adhered to without undertaking shortcuts.

Not only have board of directors become accountable, shareholders too are cast with obligations that may go beyond thinking of themselves. Advisors, trustees, employees, intermediaries, rating agencies and agents are also called upon to be more responsible.

In light of the aforesaid, we at Nishith Desai Associates, have resolved to make it our responsibility to spread awareness and share our insights on the subjects such as above through this letter ‘Yes, Governance Matters.’.

It is our mission to help you achieve your strategic objectives, guide you in complex high stake transactions, cross-border litigation and in crisis management.

We do this by our thought leadership, academics, research, innovations, advocacy, creativity, technology, organisational behavior and by better understanding the legal, regulatory and political environment and industries in which you operate.

We strive to help you preserve and enhance the value of your business by keeping you abreast of the new developments in the area of corporate governance and providing strategic legal guidance.

We hope to delve into and debate with you the ways to further improve governance standards of India Inc. through personal interactions, private client memos, in-house webinars, teleconferences, panel discussions and more. Together, we hope to develop "Next Practices" in governance because Yes, Governance Matters.

Let’s experience the joy of changing the world around us for the better - together.



- Nishith M. Desai

To learn more, please click on ‘About us’.





Institutional shareholder can no longer be a mute spectator: Stewardship governance in India


The voice of a shareholder, specifically an institutional shareholder must be heard and can no longer be ignored and as India Inc. changes its hues, one thing that remains clear is the growing need for shareholders to speak up and the need for a company to listen. Rightly or wrongly, these voices have now started emerging through various forums – the media, via regulators, at shareholder meetings, in quiet conference rooms leading us to believe that shareholder activism, specifically institutional shareholder activism, is a key aspect of the gradual convergence of India’s corporate governance praxis with global best practices.

Shareholder activism in other jurisdictions

Shareholder activism evolved in more-mature securities markets, such as the U.S., as a result of unique mix of regulation and the presence of investors with large risk-appetites1. Institutional shareholders – largely, pension funds, mutual funds, and retirement funds - came into prominence by the late-1980s for their growing investible corpuses and their ability to collaborate in pressuring management to take up governance matters which, in their view, would be most value accretive2. Similarly, in the U.K., the trend of the activist shareholder came about in the late-2000s and well into the 2010s. In the recent past, major U.K. companies have been targeted by activist shareholders3 for matters relating to board representation and governance4, managerial remuneration, business strategy, capital structure, and other social and environmental demands5. With the rising influence of stakeholder-focused corporate governance, fund managers are increasingly focusing on the long-term sustainability of business models of their portfolio companies6. With that, the Financial Reporting Council, U.K., has instituted the U.K. Stewardship Code 2020, as an overhaul of the U.K. Stewardship Code 2012. There is a strong focus on the activities and outcomes of stewardship, not just policy statements. There are new expectations about how investment and stewardship is integrated, including environmental, social and governance (ESG) issues. The Code asks investors to explain how they have exercised stewardship across asset classes7.

The ‘conscientious’ institutional shareholder

Institutional shareholders, which group includes mutual funds, insurance companies, financial institutions, foreign portfolio investors, and other pooling vehicles, control a significant portion of the capital flows in the capital markets. Companies with fairly dispersed shareholdings have significant institutional investor presence8.

Traditionally, institutional shareholders, with mutual funds and insurance companies being the largest players, have been viewed as passive investors with little to show for positive effect on company value9. Institutional shareholders deploy public wealth in different concerns, and, in doing so, are accountable as a fiduciary to its constituents. Short-term financial returns were key to institutional investors’ investment rationale. In recent years, however, there has been a slow, but definite, shift away from short-termism and passivist approach to investments. Significantly, institutional investors have started voting against remuneration packages offered to key management10 and against certain re-appointments11. Significantly, foreign portfolio investors also voted against managerial appointments in adherence with advice from offshore proxy advisory firms. The effective exercise of ownership rights, such as voting on shares held, is viewed as part of the value-creation exercise being undertaken on behalf of the constituent; the failure to exercise voting rights appropriately could result in a loss to the constituents12.

That institutional investors such as, mutual funds, insurance companies, alternative investment funds are required to act as responsible investors is not novel; each of these institutions are meant to act as fiduciaries of their respective constituents, be it policyholders (in the case of insurance companies) or unitholders (in the case of mutual funds and alternative investment funds). The Supreme Court has, in various cases, reiterated that in dealing with public money, persons or institutions must demonstrate the highest degree of integrity and trust-worthiness13 and that employees and financial institutions must discharge their fiduciary role for public confidence in financial systems to be retained14.

The growing shareholder activism15 comes in the backdrop of economic woes in India16. Fund managers are finding it increasingly difficult to keep up sustained returns for its unitholders17 and insurance companies are heavily reliant on investment profits at a time when profits are falling on the back of underwriting losses18. The assertive institutional shareholder might be a product of commercial considerations – short-termism and passivity are no longer bringing in the bacon. What is significant, however, is the regulatory push towards accountability in the institutional investors’ engagement with the management of the companies in its portfolio.

Stewardship code: Focus on greater accountability

The Insurance Regulatory and Development Authority of India (IRDAI) has in the case of insurance companies, and the Security and Exchange Board of India (SEBI) has in the case of mutual funds and alternative investment funds, mandated the implementation of ‘stewardship codes’19. It is intended that these financial institutions discharge their ‘stewardship responsibilities’ to maximize the wealth of their policyholders (in the case of insurance companies) and their unitholders (in the case of mutual funds and alternative investment funds), who are the ultimate beneficiaries of the investments made. While insurance company were already implementing a stewardship policy since 2017, the IRDAI’s revised circular dated February 8, 2020 mandates insurance companies to step up engagement with investee companies. The implementation of the stewardship code for mutual funds and alternative investment funds have now been pushed to July 1, 2020, and for insurance companies have now been pushed to May 31, 2020.

Broadly, the circulars require the institutional investors to adhere with the following investment principles:

  1. Principle 1: Institutional investors should have a stewardship policy in place and disclose same.
  2. Principle 2: Put in place a robust ‘conflict of interest’ policies, which should, amongst other things, put it place controls to identify and clear conflicts, managing investments where conflicts are detected, and ensuring segregation between voting functions and sales-related activities.
  3. Principle 3: Institute effective monitoring of investee companies and setting up the various criteria of performance.
  4. Principle 4: Intervention policies to be developed, including developing an escalation matrix for engagement with other institutional investors, shareholders, management, pushing for resolutions and other methods of asserting itself in corporate decision-making.
  5. Principle 5: Develop and publish a clear voting policy, specifying, amongst other things, principles basis which the investor shall assent or dissent from proposed resolutions.
  6. Principle 6: The investors should publish a report of the implementation of the stewardship code so that stakeholders can monitor performance by the investors.

The overall goal of the stewardship code is to push institutional investors to be responsible stewards in managing their stakeholders’ money.


  • The implementation of the new stewardship code provides a concrete opportunity for institutional investors to develop investment strategies tailored to each company. It can be expected that institutional investors to collectively push for greater accountability from the management.
  • There may also be greater focus on pushing companies to be more responsible businesses. Considering that several insurance companies and alternative investment funds now have offshore investors, we may expect there to be more focus on stakeholder-focused corporate governance norms which are in line with international best-practices to be introduced, including requiring Indian businesses to place emphasis on environmental, social, and governance risks and issues in governance.
  • The expectation is that the institutional investors shall adopt a consultative role. The management is expected to play its part by (i) engaging investors by providing up to date information and encourage company’s actions to make investors partners in the business, (ii) bringing investors on board with the Company’s financial, business, and operational issues.
  • Significantly, there are several state-owned insurance companies and mutual funds, which, as instrumentalities of the state, can push government policies on aligning business with social and economic goals of the country. For instance, adherence may be demanded with the principles of the National Action Plan on Business and Human Rights20.
  • Institutional shareholder activism will bring the stakeholders’ rights committee of the board into focus, and the board may need to have regular outreach meetings with key shareholders to bring them onboard with management’s plans.
  • With the overall investment and voting management being placed under the audit committees of the institutional shareholders, insurance companies and mutual funds are bound to place greater emphasis on these functions going forward.

Challenges that remain:

It may, however, be too optimistic to focus on the opportunities alone. The effective implementation of the stewardship code will need to surmount several challenges:

  • Institutional investors in India have traditionally been passivist and conflict with the promoters and management has been few and far between. Life Insurance Corporation of India Limited v. Escorts Limited 1986 AIR 1370 demonstrates a rare instance of a conflict between the promoter and the institutional investors. It will need to be seen if institutional investors will be able to continually challenge and question entrenched promoter groups. What has been encouraging is the growing trend where institutional investors are increasingly calling for greater management accountability and may not hesitate before biting the bullet of ousting the management: the ouster of the promoter group’s from the board of Fortis Healthcare Limited in 2018 under the aegis of institutional shareholders is the most prominent example of the rise of assertive investors21. This is in contrast to the situation in the early 2010s when the reputation of Indian capital markets investors took a beating after prominent investors were to intimidation and threats by promoters22.
  • Another aspect which has raised eyebrows in recent times, has been the role of offshore proxy advisors. Foreign investors having exposures in institutional investors and other Indian companies have adhered to advice of their offshore proxy advisors in voting against proposed resolutions, including in relation to the re-appointment of key members of the promoter group23. This had sparked some degree of controversy with Indian stakeholders widely criticizing the offshore-advisor’s understanding of corporate governance norms in India. The SEBI recently submitted the Report of Working Group on Issues Concerning Proxy Advisors advising on the manner in which proxy advisors must operate in India. Reigning in proxy advisors may adversely impact the development of institutional shareholder activism in India.
  • In the traditional sense, investment strategies for large institutional investors do not focus on enhancing, or otherwise leveraging, investments made into portfolios. With the requirement to have a dynamic investment oversight policy in place, in line with the stewardship governance norms, these investors will need to invest more time and effort in developing capabilities to ensure effective stewardship. Developing dynamic engagement strategies will take time and be a significant cost/burden on mutual funds, alternative investment funds, and insurance companies. Also, with several insurance companies and mutual being affiliated to large-cap groups, the ‘conflict of interest’ program will be put to the test, particularly from a regulatory perspective where guidance is, as yet, sparse.
  • Potentially, institutional shareholders may also be required to collaborate in order to engage with the company management. Considering that institutional investors will collaborate for the common objective to enhance investment value, the potential of institutional investors being classified as ‘persons acting in concert’ under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code) may need to be examined. Any such classification under the Takeover Code may have far-reaching implications on the institutional shareholders. Although regulators in the U.K. and the U.S. have provided guidance on when collaborative action by activist investors may or may not be viewed as ‘acting in concern’, the proposition is yet to be tested in India.


Stakeholder-driven corporate governance is where corporate governance praxis is headed. The gradual rise of the conscientious institutional investor is to be welcomed as it eases Indian companies into the new normal of ESG-driven governance agenda and of stakeholder-value maximization. As the process of salvaging the economy begins in the latter half of this year, businesses may be judged not on profitability alone but on its role in the larger re-building process. Institutional shareholders may be given the herculean task to ensure businesses are not devoid of the greater social goal. As Mr. Larry Fink, CEO, Blackrock, stated in his annual letter to CEOs, 2018, “Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth.”

Supratim Guha, Poonam Pal Sharma, Parag Srivastava & Simone Reis

You can direct your queries or comments to the authors

1 Gillan, Stuart L. and Starks, Laura T., The Evolution of Shareholder Activism in the United States (2007). Available at SSRN: or

2 Ibid.

3 Activists target dozens of UK’s biggest companies; The Times (July 23, 2019); available at:

4 Investor Edward Bramson concedes early defeat for seat on Barclays board; The Guardian (May 2, 2019); available at:

5 Filatotchev, I., Dotsenko, O. Shareholder activism in the UK: types of activists, forms of activism, and their impact on a target’s performance. J Manag Gov 19, 5–24 (2015). Available at:

6 Vanguard, “An open letter to directors of public companies worldwide”. Available at:

7 UK Stewardship Code; available at:

8 Major listed companies have significant institutional holdings, which makes their positions crucial to decision-making. See:

9 “Corporate Governance in India”; Jayati Sarkar and Subrata Sarkar, SAGE Publications, 2012

10 Institutional investors find their voice, India Inc takes note, The Economic Times (October 22, 2018); available at:

11 46% of Apollo Tyres’ institutional shareholders oppose re-appointment; Financial Express (March 27, 2019); available at:

12 G20/OECD Principles of Corporate Governance; OECD 2015; available at:

13 Regional Manager, U.P.S.R.T.C. v. Hoti Lal (2003) 3 SCC 605

14 Burdwan Central Cooperative Bank Limited v. Asim Chatterjee (2012) 2 SCC 641

15 Institutional Activism Grows At Shareholder Meetings; Bloomberg|Quint (September 28, 2017); available at:

16 Asia’s Short Sellers, Activists Go After Bigger Fish, The Wall Street Journal (November 6, 2015); Available at:

17 Coronavirus impact: Franklin Templeton Mutual Fund shuts six schemes, Rs 30,800 crore investor wealth stuck, Business Today, (April 24, 2020); available at:

DHFL Crisis: Debt Scheme Loses 50% in a Single Day; Money Life (June 5, 2019); available at:

18 General insurers see their profits fall 90% in FY19, The Economic Times (December 20, 2019); available at:

19 See: IRDAI circular dated February 7, 2020 (Ref: IRDAI/F&A/GDL/CPM/045/02/2020), which replaced the IRDAI circular dated March 20, 2017 (Ref: IRDAI/ F&A/GDL/CPM/059/03/2017), as applicable to investments by insurance companies, and the SEBI circular dated December 24, 2019 (Ref: CIR/CFD/CMD1/168/2019), as applicable to investments by mutual funds and alternative investment funds.


21 Fortis shareholders vote to oust Brian Tempest from the company's board, The Economic Times (May 23, 2018); available at:

22 Bain Capital moves HC to make public Lilliput books (Financial Express) (April 20, 2012); available at:

23 What are foreign proxy firms? This HDFC case spurts demand to regulate outside advisories in India; Financial Express (August 9, 2018); available at:

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