Stewardship codes have proliferated around the world during the last decade. It is possible to attribute the driving philosophy behind this phenomenon to the pioneering effort in the form of the UK Stewardship Code. Although there is some variation in the nature and content of these ‘UK-style’ stewardship codes, they focus on the role that institutional investors are to play in the governance of companies in which they have invested. In some cases, the codes extend beyond shareholder interests and nudge investors to focus their attention on environmental, social and governance matters (ESG). Moreover, stewardship codes are essentially ‘soft law’.
In this background, the goal of my paper ‘Shareholder Stewardship in India: The Desiderata’ is to examine whether the UK-style stewardship code, which emanated in circumstances that are specific to the UK, is capable of being transposed to other jurisdictions that experience different corporate structures as well as legal and institutional mechanisms. It does so in the context of India, which has introduced a series of stewardship codes for different types of institutional investors. The paper advocates against the adoption of UK-style stewardship in India, due to the specific factors that are at play in that jurisdiction, and instead calls for a bespoke approach.
The concept of stewardship has become well entrenched in India as a result of concrete steps that various Indian regulators have taken. The Insurance Regulatory and Development Authority of India issued a set of guidelines in 2017 on a stewardship code for insurers in India (which have since been revised in February 2020), the Pension Fund Regulatory and Development Authority issued guidelines in 2018 on a stewardship code for pension funds, and the Securities and Exchange Board of India (SEBI) issued a stewardship code in 2019 for mutual funds and alternative investment funds (AIFs). These represent an important step, as several large institutional investors either have adopted or are in the process of adopting stewardship codes on terms indicated by their respective regulators.
While there has been a concerted move towards institutional shareholder stewardship in India, it has been a fragmented effort at best. Despite strident calls for a broader stewardship code from SEBI that encompasses all types of institutional shareholders, none has been forthcoming. There is a dire need for a consolidated effort among the Indian regulators in addressing investor stewardship.
The paper argues that, given the different corporate structures and legal and institutional mechanisms in India, the Indian regulators would do well to deviate from UK-style stewardship in India. To that extent, it echoes the concerns of commentators who note: ‘For designing a ‘stewardship code’ for India, although the UK Stewardship Code might be a useful starting point, it would be wrong to transplant the UK Code’s principles and supporting guidance without adapting them to the special features of the Indian capital market’. At least three reasons necessitate such a departure from the UK-style approach to stewardship.
First, while the prominence of institutional investors in the UK in the context of companies with dispersed ownership inspired the UK-style stewardship code, the roles and challenges that institutional investors experience in India are considerably different. Indian companies largely display concentrated shareholdings with the dominance of either business families or the state as controlling shareholders. In such a scenario, the influence of the institutional investors, while gradually increasing, may be insufficient to bring about the level of engagement witnessed in companies with dispersed shareholding.
Second, the goals of stewardship may depend significantly upon whether a jurisdiction’s corporate law and governance systems are largely shareholder-oriented or whether they place considerable emphasis on non-shareholder constituencies as well. In the UK, stewardship is essentially a means by which institutional investors ensure sustainable long-term financial returns for their beneficiaries, which thereby broadly benefits society. Jurisdictions such as India, however, go further in imposing considerable stakeholder responsibilities on boards and managements, wherein shareholders (whether institutional or otherwise) are only one among several stakeholders. In such a scenario, an appropriate stewardship regime would help supplement the stakeholder approach of Indian corporate law.
Third, the UK-style approach to stewardship follows a code-based implementation using soft law. This has traditionally functioned in the UK context due to the specific circumstances that exist in that jurisdiction, including its historical affinity towards a code-based approach towards corporate governance and takeovers, among others. However, India has steadfastly relied on hard law in the form of the corporate statute or SEBI regulation as a method to enforce norms in the corporate sector. The UK-style stewardship code may have crucial limitations in its applicability to the Indian circumstance. The Indian regulators may instead need to consider other approaches, including the imposition of stewardship or engagement duties on specific types of shareholders, which is more in tune with India’s corporate regulatory philosophy.
Given the above reasons, among others, the paper cautions against the wholesale adoption of the UK-style stewardship code in India. Instead, the Indian regulators would do well to introduce a consolidated sui generis stewardship model for all institutional investors that would fit with the Indian corporate ownership structure, legal and institutional mechanisms, and corporate culture.
Umakanth Varottil is an Associate Professor at the Faculty of Law of the National University of Singapore.