SEBI rolls out a stewardship code for all mutual funds and AIFs

Syllabus subtopic: Statutory, regulatory and various quasi-judicial bodies

Prelims and Mains focus: on the stewardship code and its significance; on mutual funds, AIFs, SEBI and its functions

News: The Securities and Exchange Board of India (Sebi) on Tuesday announced the Stewardship Code for all mutual funds (MFs) and all categories of alternative investment funds (AIFs).

About the Stewardship Code

• Under the Stewardship Code, the market regulator has asked fund houses and AIFs to formulate a comprehensive policy on the discharge of their stewardship responsibilities and how institutional investors should monitor their investments in listed companies. Sebi also said that institutional investors should have a clear policy on voting and disclosure of voting activity and they should report periodically on their stewardship activities.
• The code has laid down six principles which institutional investors will have to follow for their investments in listed securities.
• The six principles laid down by SEBI are intended to strengthen the role of fund houses as stewards on behalf of the investors.
• Under stewardship responsibilities, institutional investors are expected to have a greater responsibility towards their beneficiaries by enhancing monitoring and engagement with their investee companies.
• Such increased engagement is also seen as an important step towards improved corporate governance in the investee companies and gives a greater fillip to the protection of the interest of investors in such companies.
• The Stewardship Code shall come into effect from April 1, 2020.

Way ahead

Sebi said every institutional investor should formulate a policy on how it intends to fulfil the aforesaid stewardship responsibilities and disclose it publicly and have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities publicly disclose it.

About SEBI

Securities and Exchange Board of India (SEBI) was established in 1988, however, it got statutory mandate and powers under the SEBI Act, 1992. Its objective is to protect the interests of investors in securities and to promote the development and regulation of the securities market.

Functions:

• Regulating stock exchanges and other securities markets
• Registering and regulating the working of intermediaries who are associated with securities markets in any manner.
• Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds
• promoting and regulating self-regulatory organizations and prohibiting fraudulent and unfair trade practices relating to securities markets.

A merger of FMC with SEBI

In 2015, the Forward Market Commission was merged with SEBI. With this, the regulation of the commodity derivatives market has shifted to SEBI under the Securities Contracts Regulation Act (SCRA) 1956. The Forward Contracts Regulation Act (FCRA), 1952 got repealed and FMA ceased to exist. With this merger, all three national and six regional commodity exchanges have come under the ambit of national capital market regulator SEBI. This merger has created SEBI as a unified regulator for commodities and capital markets in India.

Alternative Investment Funds (AIFs)

• As defined in Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, AIFs refer to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP).
• AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities.
• Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.

Categories:

As per SEBI (AIF) Regulations, 2012, AIFs shall seek registration in one of the three categories:

Category I: Mainly invests in start- ups, SME’s or any other sector which Govt. considers economically and socially viable.

Category II: These include Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator

Category III : Alternative Investment Funds such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other Regulator.

About Mutual Funds

A mutual fund collects money from investors and invests the money on their behalf. It charges a small fee for managing the money. Mutual funds are an ideal investment vehicle for regular investors who do not know much about investing. Investors can choose a mutual fund scheme based on their financial goal and start investing to achieve the goal.