Mutual Funds, AIFs to Follow Stewardship Code: SEBI

In a move to enhance Corporate Governance of the Investee Companies, Securities and Exchange Board of India (SEBI) announced that Mutual Funds (MF) and Alternative Investment Funds (AIF) will compulsorily adhere to the Stewardship Code from April 1, 2020. The code will require institutional investors to formulate new policies to enhance transparency and their role in the Financial Market.

Crux of the Matter
  • SEBI, in co-ordination with IRDA and PFRDA, got approval from the Financial Stability and Development Council to implement the stewardship principles in India.
  • Fundamentally, the institutional investor will have to formulate policies for stewardship responsibilities and dissemination of information to the public.
  • It is also required for companies to have a code implemented to manage conflict of interest.
  • The Code will also require institutions to regularly monitor their investee companies, their performances, corporate governance policies, risk management policies, etc. and to seldom intervene if the situation – like poor performance, corporate governance issues, leadership problems, litigation, etc. – demands.
  • Moreover, institutional investors will be required to have a detailed voting policy. It may contain rules and regulations on mechanisms of voting, proxy voting, and when to eschew from voting.

The Stewardship Code is a part of UK company law concerning principles that institutional investors are expected to follow. It was released in 2010 by the Financial Reporting Council, and is directed at asset managers who hold voting rights on shares in United Kingdom companies. Its principal aim is to make institutional investors, who manage “other people’s money”, be active and engage in corporate governance in the interests of their beneficiaries (the shareholders). India’s Stewardship Code has its root in the seven guiding principles of the UK Code. More Info

India's Biggest Lender, SBI Under-Reported INR 12k Crore of NPAs

In a filing to SEBI, State Bank of India stated that it had underreported bad loans of INR 11,932 crores in the last fiscal year. RBI directed that the bank will have to provide for additional bad loan provision, which in turn will show a loss of INR 6,968 crore in the books of SBI.

Crux of the Matter
  • RBI, in its review, noted that the State Bank of India had not reported INR 11,932 crores of non-performing assets (NPAs).
  • SBI’s reported gross NPA of INR 1,72,750 crores will have to be increased to INR 1,84,682 crores.
  • As a result, SBI will have to provision INR 12,036 crores for bad loans.
  • The balance sheet profit of FY 18-19 INR 86 crore will be reduced to a loss of INR 6,968 crores.

A non-performing loan (NPL) is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days, but this can depend on the contract terms. In India, non-performing loans are common in the agricultural sector where the farmers can’t pay back the loan or the interest amount mainly as a result of losses due to floods or drought. More Info