Corporate governance: Analysing the role of Stewardship Code in India
The Indian Stewardship Code was introduced by the Securities and Exchange Board of India (SEBI) in 2017, with the aim of promoting good corporate governance practices and enhancing transparency and accountability among Indian companies. This research paper aims to analyse the impact and effectiveness of the Stewardship Code in promoting responsible stewardship and investor protection. The research begins by providing an overview of the Stewardship Code and its key provisions, including its principles, disclosure requirements, and reporting mechanisms. It then examines the role of institutional investors and Indian companies, analysing their behaviour and their significance in corporate governance practices. The research also explores the benefits and challenges of the Stewardship Code. However, the study also identifies certain challenges in the effective implementation of the Code, such as the lack of enforcement mechanisms, limited awareness among investors, and the need for greater standardization of reporting. Overall, the research concludes that the Indian Stewardship Code represents a positive step towards promoting good corporate governance practices and protecting investor interests in India. However, to fully realize its potential, there is a need for greater awareness and education among stakeholders, stronger enforcement mechanisms, and a more coordinated approach to implementing the Code.
Introduction
One could argue that in the modern world, corporations increasingly only have capitalist objectives. Today’s economy and various facets of business life have begun to move towards capitalism. However, this capitalism needs to be kept in control. In a globalised world, maintaining ethical and just business practises is just as crucial as maximising earnings. All company stakeholders anticipate good governance in this situation, more specifically, effective corporate governance. While it is the responsibility of businesses to abide by the standards of recognised governance principles, it is equally crucial for key stakeholders to maintain checks in order to bring about maximum efficiency. Every business stakeholder, including customers, employees, and shareholders, is involved in this, albeit to varying degrees and capacities.
Significant institutional investors include mutual funds and insurance companies. These investors made investments in publicly traded companies and now retain those investments as custodians for the holders of those investments, or stewards. The institutional investors must make sure that the investee company will keep high levels of corporate governance standards because the state of governance is a crucial factor.
Therefore, it is believed that this Institutional company should participate actively in the general meetings of investee companies and interact with the managements at a high level to improve their governance in order to safeguard the interests of the Client/beneficiary. This results in the client’s interests being protected. For institutional investments in India, SEBI released the Stewardship Code 2019, which took effect on April 1st, 2020. In order to increase investor involvement and transparency, this Code places a number of obligations on institutional investors who invest in listed companies in the form of principles. This Principle helps institutional investors carry out their stewardship obligations and raise the Beneficiary’s worth.
“The institutional investors must make sure that the investee company will keep high levels of corporate governance standards because the state of governance is a crucial factor.”
Indian Stewardship Initiatives & Institutional Landscape
The need for a specialised stewardship code has only recently been acknowledged, despite regulatory efforts over the past ten years in India having allowed for greater shareholder involvement and participation. The need for such a rule in India was highlighted in 2016 by the Financial Stability and Development Council (FSDC), an organisation that works to harmonise different financial authorities. Several committees and working groups have vehemently urged SEBI to release a uniform stewardship rule for India’s financial markets in the interim. It is obvious that the UK Stewardship Code had an effect on the procedure.
The India-UK Financial Partnership recommended in November 2016 that the Indian regulators adopt an “Indian Stewardship Code,” which “will strengthen the ability of Indian shareholders to perform their fiduciary duties, improve the relationship between the boards of Indian companies and their shareholders, and help foster shareholder loyalty.”
In March 2017, the IRDAI released a list of governance code suggestions for Indian insurance companies. In accordance with these regulations, insurers are expected to put in place specific stewardship standards that operate on a comply-or-explain basis. The Stewardship Code finally went into force in July 2020.
SEBI Alternative Investment Funds (AIF) Classification (2012 Regulations)1:
- Category I: Venture Capital, Small and Medium Enterprises (SMEs), Infrastructure, Social Ventures, Angel funds, etc.
- Category II: Private Equity (PE) funds, debt funds.
- Category III: Hedge funds, funds trading to make short-term returns.
Landmark Judicial Anchor: Life Insurance Corporation v. Escorts Ltd. (1986)2
The Supreme Court of India held that LIC, as an institutional investor, can call for an extraordinary general meeting (EGM) to vote on the removal and replacement of directors in the interest of insurance policyholders. This historic judgment recognized the active fiduciary responsibility of institutional investors in corporate governance in India.
“Comply or Else” vs. “Comply or Explain”: The Indian corporate governance paradigm has traditionally been anchored in the American “comply or else” model, where legal mandates enforce adherence and impose stringent statutory penalties for non-compliance due to historical instances of corporate fraud. Conversely, the UK and OECD nations rely upon “comply and explain” frameworks tailored to institutional structures. The 2019 Stewardship Code marks a distinctive hybrid transition towards codified fiduciary standards.
Influence from the UK Stewardship Code
At least 10 stewardship codes are currently in use globally, primarily rooted in the UK model. The UK Financial Reporting Council (FRC) issued the first Stewardship Code in 2010 in response to the 2008 global financial crisis. It requires institutional investors to:
- Publicly publish their policy on how they will carry out their stewardship responsibilities.
- Maintain and publicly disclose a robust conflict of interest management policy.
- Systematically monitor investee companies.
- Establish precise escalation criteria to protect and enhance shareholder value.
- Collaborate with other institutional investors when necessary.
- Regularly report on stewardship actions and maintain a clear, disclosed voting policy.
The 6 Principles of the Indian Stewardship Code
Principle 1: Stewardship Policy Formulation3
Institutional investors must formulate a comprehensive stewardship policy, approved by the Board of Directors, and publicly disclosed online. Covers monitoring, risk control, capital structure, and value creation. Reviewed within 3 months of circular (dated 17.02.2020).
Principle 2: Managing Conflicts of Interest4
Identify conflict zones and establish a detailed policy prioritizing client/beneficiary interests. Mandates separation of Conflict of Interest Committees, voting functions, and client relations, with blanket investment bans where severe conflicts exist.
Principle 3: Monitoring Investee Companies5
Continuous monitoring proportionate to company size, covering financial performance, board leadership, management quality, related party transactions, ESG risks, and shareholder grievances, while strictly adhering to insider trading regulations.
Principle 4: Active Intervention & Collaboration6
Clear triggers for intervention: poor performance, governance failures, excessive remuneration, leadership issues, and ESG non-compliance. Establishes regular board dialogues and collaboration mechanisms with peer institutional investors.
Principle 5: Voting Rights & Disclosure7
Exercising voting rights actively rather than showing blind faith in management. Mandates comprehensive public disclosure of voting policies and detailed records of all actual proxy votes cast on company websites and annual reports.
Principle 6: Periodic Reporting of Stewardship8
Periodic reporting to clients and public disclosures on stewardship actions implemented by investment committees and equity teams, ensuring transparency and institutional accountability.
Behaviour of Institutional Investors in Indian Companies
While promoters maintain near-100% attendance, institutional investor participation has seen steady gradients. In 2019, ITC recorded the highest institutional participation rate (93.61%). The vast majority of resolutions pass with little resistance, indicating investor loyalty. Active institutional “voice” is predominantly focused on the appointment/reappointment and remuneration of directors and auditors:
TABLE: Data on Institutional Investors from Top Companies9
| Name of the Company | Number of Institutional Investors That Cast Their Votes | Decision on Appointment / Reappointment & Remuneration of Directors | Decision Regarding Dividends | |||
|---|---|---|---|---|---|---|
| 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | |
| HDFC Bank | 86.089 | 86.379 | 0.148 | 0.251 | 0.00 | 0.00 |
| Infosys | 70.235 | 77.844 | 0.536 | 0.079 | 0.00 | 0.00 |
| ITC | 92.241 | 89.130 | 0.713 | 0.122 | 0.00 | 0.129 |
| Hindustan Unilever | 75.478 | 80.975 | 17.291 | 0.250 | 0.00 | 0.00 |
Critical Drawbacks in the Indian Stewardship Code
1. Absence of Specific Enforcement Mechanisms
While SEBI rules impose stewardship obligations on mutual funds and AIFs, they stop short of defining concrete penal consequences for breaches. Without explicit punitive deterrence, there is significant risk of compliance deteriorating into superficial box-ticking.
2. International Proxy Advisories Remain Unregulated
Indian regulations regulate domestic proxy firms but fail to exercise jurisdiction over influential global proxy advisors like Institutional Shareholder Services (ISS) and Glass Lewis & Co. For instance, their aggressive opposition to the appointment of industry veterans Deepak Parekh, Dr. Bimal Jalan, and Bansi Mehta to the HDFC Board led to two resignations prior to voting. Such foreign proxy firms frequently impose rigid Western corporate governance templates that ignore the contextual nuances of Indian enterprise structures.
3. Limitations of the “Comply-or-Explain” Strategy
IRDAI’s comply-or-explain regime presumes high shareholder monitoring capacity and transparency. However, empirical studies (e.g., Arcot & Bruno, LSE 2006) revealed that in the UK, over 50% of companies violated governance codes without providing precise justifications, and 15% provided no explanation at all10. In developing markets like India, soft comply-or-explain structures prove ineffective without rigorous administrative enforcement.
Conclusion: Transitioning to “Apply and Explain”
The Stewardship Code represents a vital catalyst in strengthening corporate governance, enhancing investor confidence, and disciplining investee managements. However, the current framework exhibits notable gaps: lack of formal dispute resolution mechanisms and an excessively narrow scope limited solely to listed equities (excluding diversified alternative holdings).
The Way Forward: India must progressively transition from “comply-or-explain” to an “apply-and-explain” model—demanding institutional investors disclose empirical actions taken and recorded outcomes achieved, rather than merely stating forward-looking intentions.