Stewardship Code for Mutual Funds — How AMCs Vote on Portfolio Company Resolutions
Mutual funds are among the largest institutional shareholders in India's listed companies. Collectively, AMCs hold significant stakes across thousands of companies on behalf of millions of retail investors — which means every board resolution a listed company puts to a shareholder vote is, in effect, being decided partly by fund managers acting as proxies for ordinary savers. SEBI's Stewardship Code exists to ensure that this enormous voting power is exercised thoughtfully, transparently, and genuinely in investors' interest, rather than being handed over passively to company management.
What "Stewardship" Means Here
Stewardship, in this context, refers to an institutional investor's responsibility to monitor and actively engage with the companies it invests in — not just buy and sell their shares. This engagement can take the form of detailed discussions with company management, interaction with boards, and voting at shareholder meetings. The Stewardship Code applies to mutual funds in relation to their investments in listed equities and is built around six core principles.
Principle 1: A Comprehensive, Disclosed Stewardship Policy
Every mutual fund must formulate a comprehensive policy on how it intends to discharge its stewardship responsibilities, publish it publicly, and review and update it periodically. This policy must cover monitoring and engagement on company performance, strategy, corporate governance (board structure, remuneration), and material ESG risks or opportunities. If any part of this function is outsourced, the policy must explain how stewardship responsibilities will still be exercised diligently.
Principle 2: Managing Conflicts of Interest
An AMC's fund management arm may hold shares in a company that is also, say, a group entity of the sponsor, a distributor, or a client of the AMC's other business lines. The Code requires a clear, disclosed policy identifying such conflict scenarios and the procedures used to manage them — ranging from blanket investment bans in certain situations, to a dedicated Conflict of Interest Committee, to clear segregation between the voting function and client relationship or sales functions, along with a recusal mechanism for anyone with a personal or organisational conflict in a specific decision.
Principle 3: Continuous Monitoring of Investee Companies
Mutual funds must actively monitor the companies they invest in — not just at the point of purchase. This monitoring should cover company strategy and financial performance, industry-level developments, quality of management and the board, corporate governance practices including related-party transactions, ESG risks, and shareholder rights. The Code recognises that monitoring intensity can reasonably vary — a company representing a large position in the fund's AUM warrants closer scrutiny than a small, immaterial holding — but the fund must document its monitoring framework and be mindful of insider-trading regulations while seeking information from investee companies.
Principle 4: A Clear Intervention Policy
Where monitoring reveals a problem — poor financial performance, governance failures, questionable remuneration, leadership issues, or litigation — the fund is expected to have a defined escalation path for intervention. This can range from direct discussions with management, to formal meetings with the board, to collaborating with other institutional investors (including through bodies like AMFI) to press for change, and ultimately voting against management proposals.
Principle 5: A Transparent Voting Policy
This is the principle investors encounter most directly. SEBI requires mutual funds to take their own, independently reasoned voting decisions rather than routinely rubber-stamping management resolutions. The voting policy must specify:
- The voting mechanism used (e-voting, physical attendance, proxy voting).
- Internal guidelines for assessing proposals and deciding whether to vote for, against, or abstain, including specific guidance for particular categories of resolutions.
- An oversight or escalation committee for difficult voting decisions.
- The use of proxy advisory services, if any, and the extent to which their recommendations are relied upon.
- Disclosure of the actual vote cast on every resolution at every investee company meeting, along with the rationale for the vote, published periodically — typically on a quarterly basis for voting disclosures and at least annually for policy-level disclosures such as the conflict-of-interest policy.
Principle 6: Periodic Reporting to Investors
Mutual funds must report periodically to their unit holders on how stewardship responsibilities have actually been discharged, in an easy-to-understand format. This is typically done through disclosures on the AMC's website (which may itself be broken down principle-by-principle, with different disclosure frequencies for different principles) and can also form part of the annual communication to investors.
Fund Manager Accountability
A related and important safeguard requires the fund manager or decision-maker responsible for a voting decision to submit a periodic — typically quarterly — declaration to the trustees confirming that votes cast were not influenced by any factor other than the best interest of unit holders. This creates a documented, accountable trail linking each vote back to the individual who made the call.
Why It Matters
Because mutual funds vote on behalf of retail savers who will never personally attend a company's AGM, the Stewardship Code is what stands between passive rubber-stamping of management proposals and genuinely active oversight of the listed companies that people's retirement savings and SIP contributions are invested in. For compliance professionals and trustees, the voting disclosure and rationale requirements under this Code are also a recurring item that must be reviewed and reported on periodically, making it one of the more visible governance obligations an AMC carries.