Guidelines for Votes Cast by Mutual Funds Prescribed by SEBI

The Securities and Exchange Board of India (SEBI), by way of the powers bestowed under the provisions of section 11 (1) of SEBI Act 1992, read with the provisions of Rule 77 of the SEBI (Mutual Funds) Regulations 1996, has issued guidelines for Votes Cast by Mutual Funds.

Further, such guidelines were issued by the SEBI Circular No SEBI/HO/IMD/DF4/CIR/P/2021/29, issued on 05.03.2021. Also, it shall be noted that the guidelines issued will come into force form 01.04.2021, except paragraph 2, as the same will come into effect from the date mentioned.

In this learning blog, we will deal with the notion of Mutual Funds, together with the Guidelines for Votes Cast by Mutual Funds.

Concept of Mutual Funds

The term Mutual Funds (MF) signifies one of the most chosen investment optionsthese days. It is an investment vehicle formed when an Asset Management Company (AMC) or fund houses pool in the investment gathered from several institutional investors and individuals against the common investment objectives.

Further, the money collected is then invested in various capital market instruments, such as debentures, shares, and other securities.

Also, the income generated by way of these instruments and capital appreciation is shared with the unit holders in proportion to the total units owned by them.

Therefore, it shall be noted that Mutual Fund is one of the most appropriate investment for a common man as it provides them with an opportunity to invest in a professionally managed, diversified basket of securities, that, too, at relatively very low cost.

Also, Read: Revised Framework for Innovation Sandbox Prescribed by SEBI

Reasons for Issuing Guidelines for Votes Cast by Mutual Funds

SEBI, by way of the circulars, as follows, has prescribed the guidelines concerning Votes Cast by Mutual Funds:

• Circular no. SEBI/IMD/CIR No/18/198647/2010, issued on15.03.2010;
• Circular no CIR/IMD/DF/05/2014, issued on 24.03.2014;
• Circular no SEBI/HO/IMD/DF2/CIR/P/2016/68, issued on 10.08.2016, and; 
• Circular no CIR/CFD/CMD1/168/2019, issued on 24.12.2019;

Further, in order to improve and infuse more transparency as well as to encourage Mutual Funds/AMCs (Asset Management Companies) to thoroughly exercise their voting rights in the best interest of the unit holders and on the basis of the deliberations in MFAC, SEBI has prescribed some additional guidelines.

Additional Guidelines Issued by SEBI for Votes Cast by Mutual Funds

The Additional Guidelines for Votes Cast by Mutual Funds are as follows:

Passive Investment Schemes

All the Mutual Funds that comprise their passive investment schemes, such as Index Funds, ETFs (Exchange Traded Funds) etc., shall be needed to cast votes mandatorily in respect of the resolutions as follows:

• Matters specified at Paragraph no. 4 (iii) of SEBI Circular no SEBI/ IMD/ CIR No/18/198647/ 2010, issued on 15.03.2010;

1. Corporate governance matters, inclusive of changes in the state of incorporation, merger, and other modes of corporate restructuring, and anti-takeover provisions;
2. Alterations to the Capital Structure, including the increases and decreases of capital, together with preferred stock issuances;
3. Stock Option Plan and any other Management Compensation Issues;
4. Issues concerning Social and Corporate Responsibility;
5. Appointment and Removal of Directors;
6. Any other matter that may affect the shareholders interest in general and the interest of the unit holders in particular;

• Related Party Transactions (RPT) of the investee companies (exclusive of own group companies). Further, for this purpose, it shall be noted that “Related Party Transactions” will have the same meaning as given to them under the provisions of clause (zc) of sub regulation (1) of Rule (2) of the SEBI (Listing Obligation and Disclosure Requirements) Regulations 2015.

Remaining Provisions

For all the remaining resolutions that are not covered under paragraph 1 of this circular, MF (Mutual Funds) shall also mandatorily be needed to cast their votes from 01.04.2022.

No Economic Interest on the Voting Day

Ifin case the Mutual Funds do not have any economic interest on the voting day, the same will be exempted from mandatorily casting of votes.

Views of Fund Managers

The vote will be cast at the Mutual Fund Level. However, it shall be noted that in case the Fund Manager of any specific mutual fund scheme has a strong view point against the views expressed by the Fund Manager of the other schemes, then, in that case, the voting at the scheme level will be allowed, subject to the recording of detailed reasoning for the same.

Submission of Declaration

It shall be noted that Fund Managers or Decision makers will require to submit a declaration on a quarterly basis to the Trustees, stating that the votes cast by them have not been prejudiced by any factor other than the best interests of the unit holders. Also, the Trustees in their Half-Yearly Trustee Report, which they furnish to SEBI, need to confirm the same.

Conclusion

In a nutshell, the main rationale behind the passing of guidelines for Votes Cast by Mutual Funds was to improve the market conditions, to infuse more transparency, and to encourage Mutual Funds and Asset Management Companies to carefully exercise their voting rights in the best interest of the unit holders.

Also, Read: SEBI Guidelines for Issue of Debentures in India

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