Mutual funds may face SEBI ire over casual voting

Senior executives at some other fund houses admitted that mutual funds in India were yet to act as 'activist' shareholders, as has been the case in developed markets of the US and Europe

New Delhi: Mutual funds (MFs) may soon face some tough questions from market regulator Securities and Exchange Board of India (SEBI) regarding the exercise of their vote on key business proposals of the companies in whose shares they have put in investors' money, reports PTI.

The market watchdog is irked by the casual approach adopted by most of the funds when it comes to voting on proposals put forth by the company management for shareholder approval, as also the disclosure of these votes, a senior official told PTI.

The current dispensation at SEBI, with chairman UK Sinha coming from a mutual fund background, is looking at measures like distributor incentives and making MFs a preferred stock market route for retail investors.

At the same time, the regulator wants funds to adopt the role of conscience-keeper for listed firms by actively raising their voice on the listed companies' corporate governance practices, the official added.

Mutual funds collect money from investors and put the capital in shares of various listed companies and thus become their major institutional shareholders. This gives them significant voting power in key decisions of listed firms, but they have so far mostly acted as yes-men or indifferent when proposals are put to vote by the companies.

This passive stance of fund houses, including by leaders like ICICI Prudential and Reliance MF, has come to fore after SEBI pushed them to make public their votes as shareholders.

Unsatisfied by the disclosures, SEBI is considering changes in its rules and might ask the funds to be more specific, including about reasons behind their votes.

Some funds are now considering outsourcing their voting job to specialist entities.

However, SEBI might wait for its proposed policy on outsourcing by market entities to come into place before taking any decision on any such proposal from the fund houses.

On their part, some MFs assert that they take utmost care in deciding on votes and they invest only in those companies where they have faith in the management's decisions.

While large fund houses like Reliance MF and ICICI Pru did not reply to queries on their voting, Quatum MF said it decides carefully on each vote.

"At Quantum, we understand the responsibility of proxy voting. It is only after careful consideration of each proposal that we decide to vote for it or against it, or abstain from casting our vote," Quantum AMC director IV Subramaniam said in an emailed statement.

"This year it could be a case where most resolutions deserved a 'yes' than a 'no'. Additionally, in the case of Quantum, we invest in good businesses with good managements.

This itself allows us to avoid companies that have too many contentious issues to be voted on," he added.

However, most of the fund houses have either favoured the proposals or have decided to abstain from voting and instances of voting against a proposal is abysmally low.

The voting pattern is also in sharp contrast to SEBI's aim to push the mutual funds to act as conscience-keeper of listed firms by actively voicing their support or opposition to various business decisions of the companies.

SEBI made it mandatory last year for fund houses to make public their 'voting policy' and also their votes, but it took another reminder by the regulator last month for them to declare their voting details.

Subsequently, the funds have disclosed their votes for the fiscal year 2010-11, but the market regulator is unsatisfied with details provided by some of them. In some cases, funds have disclosed their votes without even naming the company, while there are also instances of all votes not being disclosed.

Quantum's Mr Subramaniam said: "If there are some serious corporate governance issues, then we have preferred to exit the investments rather than voting against the issue."

He gave the example of Ranbaxy, where it exited the stock when the founders sold their shares to a foreign partner without giving a similar chance to minority shareholders.

"Similarly, in other cases, we have written letters to management seeking an explanation for certain actions. It is our earnest intent and actual practice to play an active role on behalf of our investors in the decisions taken by the companies we invest in," he said.

Mr Subramanian said that voting at general body meetings was one way to express our opinion, though not the only one.

Senior executives at some other fund houses, however, admitted that mutual funds in India were yet to act as 'activist' shareholders, as has been the case in developed markets of the US and Europe.

It was in the backdrop of Satyam scam, which came to light partly due to dissenting voices raised by some MF shareholders against the management at that time that SEBI had decided to promote the activist role of fund houses.

The market watchdog is of the view that the fear of a possible opposition by institutional investors like mutual funds being made public would force the companies to follow the best corporate governance practices in their businesses.

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Major PSU banks likely to raise lending rate soon

Some banks, which have substantial CASA (Current Account Savings Account) deposits, do have some neutralising impact on rise in cost of funds. However, these banks will also have to raise rates soon to stay competitive in the market

New Delhi: Major public sector banks, including State Bank of India, Punjab National Bank and Bank of Baroda, are likely to soon raise lending rates making home, auto and commercial loans expensive, reports PTI.

As many as a dozen banks, including private sector leader ICICI Bank have already hiked their lending rate by 25 basis points (bps) in response to the tightening of monetary policy by the Reserve Bank last month.

It is a matter of time that other lenders would follow the suit as cost of fund has gone up following the 25 bps increase of key policy rates by the Reserve Bank of India (RBI) on 16th June, experts said.

The RBI hiked key short-term lending and borrowing rates by 25 bps (0.25%) each with immediate effect to tackle inflation. The short-term lending (repo) rate rose to 7.5% and the borrowing (reverse repo) rate at 6.5%.

Some banks, which have substantial CASA (Current Account Savings Account) deposits, do have some neutralising impact on rise in cost of funds. However, these banks will have to raise rates soon to stay competitive in the market, experts said.

Besides, banks would raise rates in order to protect their net interest margin (NIM), they added.

In response to tight money supply by the RBI, banks started raising lending rate.

On Saturday, ICICI Bank increased lending rate by 25 bps raising cost for those who had taken advances on floating rate of interest.

Besides, leading public sector lender Canara Bank also raised lending rate by 25 bps. Other state-owned lender Indian Overseas Bank and Dena Bank have also announced increase in their lending rates by similar margin.

Earlier in the week, Corporation Bank also raised base rate or minimum lending rate by 25 bps.

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Reverse merger frauds: On the importance of the honesty of a brand

The confidence of investors seeking to participate in the vibrant growth of emerging market companies has been shaken by a spate of scandals in the US markets involving reverse mergers

The American comedian Groucho Marx once said, "I don't want to belong to any club that will accept me as a member." He understood that there was an economic advantage to maintaining the quality of an exclusive brand. It is a lesson that stock markets in the developed world would be encouraged to emulate, but the economic incentives are pushing the other way.

Information has value. It will only be disclosed for two reasons. Consideration—someone pays for it—or legal punishment—someone pays a fine or goes to jail. Many times, in emerging markets, the local legal infrastructure is not up to the job. Lack of money, independent courts, free speech, and insulation from political pressure conspire to rot the teeth of potential watchdogs.

If investors wish to participate in some of the vibrant growth of emerging market companies, they often take some confidence that companies listed in New York or London operate under the scrutiny of established well-funded regulators. Recently, this confidence has been called into question.
 
In the US, the markets have recently been plagued by a spate of scandals involving reverse mergers. Normally, to sell securities to investors it is necessary to go through a lengthy and expensive registration process. The process requires extensive disclosures and certifications. Providing false information can subject the promoters, lawyers and accountants involved in the listing to both civil and criminal penalties. Reverse mergers involve none of these hurdles.

If only US companies used this device, which has been around for years, there might not be any problems. But markets in developed countries are under pressure to remain competitive and global. Or to put it another way, the investment banks that thrive on these deals don't want the regulators to scare away business. The result is that many firms from emerging markets, especially from China, have been able to raise capital with a premium granted to firms that list in developed markets. Of the more than 600 firms that listed through reverse mergers since 2007, over 25% were Chinese.

One of the main reasons why it is difficult for developed country watchdogs to police firms in emerging markets is that much of the information is beyond their reach. For example, although an accounting firm certified by American standards must sign off on the books, often the American firm is relying of information provided by Chinese firms. This is not just an issue in the US. The regulators in Hong Kong have a similar problem. Listings in Hong Kong are supposed to be subject to the heightened scrutiny of local regulators, but most of the information is out of reach on the mainland.

Although China is attempting to clean up its reporting standards in order to assure the flow of foreign direct investment, some recent rules may simply make the problems worse. Information beyond the government's control is not allowed in China. The Chinese finance ministry has published guidelines that require Chinese firms with foreign listings to choose auditors with established reputations and international-caliber skills. The catch is that they can only choose firms that will protect 'national economic information', which is whatever the Chinese government wants it to be.

It is not just New York and Hong Kong that have had problems. London went out of its way to attract listings from firms in the former Soviet Union. The results have not always been promising. For example, a company called Baltic Oil Terminals, which operates facilities in the Russian enclave of Kaliningrad, stated that it's "local financial records had either been destroyed, or removed, and an attempt made at replacing these with falsified information".

And it is not just small companies. Eurasian Natural Resources Corp (ENRC) is a Kazakhstan company owned by Kazakh oligarchs and the Kazakh government. It is also part of the UK's blue chip FTSE 100 index, which automatically makes it a necessary holding for ETFs and many pension funds.

To clean itself up prior to its listing, the Kazakh owners were replaced by reputable British businessmen as independent directors. It didn't help. This window dressing was recently removed in a board room coup that reinstated directors more subject to the commands of ENRC's owners. The company's shares have fallen 36% from this year's high.

Of course there are demands to tighten up the regulations of emerging market companies on developed markets, but it is hardly surprising that these are met with resistance. Additional rules in the West often result in howls of protests as the new rules are supposed to be responsible for "driving" listings to Asia. The finance industry should understand, though, that it is the honesty inherent in the brand that makes them money, and that every bad apple that they keep out will mean more money that comes in.  

(The writer is president of Emerging Market Strategies and can be contacted at [email protected]  or [email protected].)

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