The Proliferation of Stewardship Codes In India – The Need For Revamp

[By Mathangi K ]

The author is a student at the Gujarat National Law University.


The idea of a Stewardship Code has gained prominence across the world, with the UK adopting the world’s first Code for its domestic financial market in 2010.[i] The principal objective behind the UK’s adoption of the Stewardship Code was to incentivize its ‘rationally passive’ shareholders to monitor the company’s management, thus helping them become responsible and actively engaged shareholders.

Soon after the UK adopted the Code, such Codes proliferated throughout Asia; India followed suit with the Insurance Regulatory and Development Authority of India (IRDAI), the nodal agency for regulating the insurance sector, enacting a set of stewardship guidelines for the insurers in 2017.[ii] This was followed by the Pension Fund Regulatory and Development Authority’s (PFRDA)guidelines for pension funds in India in 2018,[iii] followed by the Securities and Exchange Board of India’s (SEBI)guidelines for mutual funds and alternative investment funds in 2019.[iv]The most recent development is the enactment of procedural guidelines for proxy advisories in India by the SEBI in August 2020.[v]

This article aims to explain why the Code will have a minimal impact and may not bring a considerable difference in the Indian corporate governance regime. It traces through the poor implementation and redressal mechanism of the various codes and suggests suitable measures with a view to improving the same.

The Problem of Enforcement

However, even after the enactment of these Codes, they have been at the center of the debate over their effectiveness and implementation. Globally, the most critical verdict on the Code’s implementation was featured in the FRC’s Kingman Review 2018, which commented that ‘the Code remains simply a driver of boilerplate reporting, serious consideration should be given to its abolition’.[vi]

In terms of its enforcement mechanism, the Stewardship Code in India differs largely from the UK’s idea of ‘soft law instrument’. Firstly, there is a lack of a single code in the form of soft law, but instead, several mandatory guidelines have been issued by the regulatory agencies for their respective stakeholders. This extreme fragmentation of codes in India leads to contradictions, both in theory and the enforcement of these codes. For instance, the code issued by the IRDAI is based on the ‘comply-or-explain’ basis. On the other hand,  the code by the PFRDA lays down that the pension funds ‘shall follow’ and the code by SEBI for mutual funds and alternative investment funds lays down that the funds ‘shall mandatorily follow’ the code.  Lastly, the procedural guidelines for proxy advisories lay down that these advisories ‘shall comply’ with these guidelines. Secondly, while these codes lay down the principles, none of these adequately provide for a redressal mechanism or lay down the consequences of violation or non-compliance to the principles indicated in the guidelines.

The Feasibility of the Comply-or-Explain Approach

The IRDAI’s guidelines for the insurers work on the basis of the ‘comply-or-explain’ approach; wherein, the insurers are required to indicate reasons and justifications for the deviation or non-compliance to the principles enshrined in the guidelines. On the face of it, the comply-or-explain approach has the inherent advantage of tailoring the principles to the unique characteristics of individual companies, thus appearing to be better than the “one size fits all” approach. At the same time, the effectiveness of this approach presupposes the presence of various institutional conditions such as the ownership and control structure, transparency of financial operations of the company, the ability of the shareholders to assess the behavior of companies. All of these factors are an extremely costly as well as challenging task in an emerging economy like India. This approach has proven to be ineffective even in a developed economy such as the United Kingdom; for instance, a study of compliance behavior of firms belonging to the FTSE350 companies in the UK between 1998 to 2004 reports that more than 50% of the companies that did not comply with the corporate governance codes and failed to deliver specific explanations, while more than 15% failed to provide any kind of explanations at all.[vii]This lack of compliance of the entities with the codes and subsequent failure to provide explanations, exposes the little initiative taken by companies for fine-tuning their governance policies since there was hardly any movement towards providing adequate explanations.

Further, in this approach, there are two judges to the alternative proposal structures or explanations provided by the insurers- the market and the regulator. Firstly, the market, which encompasses the shareholders, is a costly way of enforcement. The ultimate sufferer due to the fall in the shares’ price is the shareholders themselves, thus becoming counter-intuitive to the purpose for which it was created. Secondly, for the regulator to be the judge can be a challenging task, in an emerging economy like India. The market regulators in India are still in the process of framing governance standards and therefore do not have well established and tested benchmarks against which the sufficiency of the explanations provided by the insurers can be judged.

The Lack of an Enforcement Mechanism

While the PFRDA’s and SEBI’s guidelines for mutual and alternative investment funds introduce a far more stringent approach to ensure compliance, these fail to lay down a concrete enforcement mechanism. Until today, the consequences faced by an institutional investor upon failure to comply with the code remains a grey area. Consequently, these guidelines will fail to translate into action unless accompanied by a well-established enforcement mechanism. Contrary to these guidelines, the SEBI’s latest guideline for the proxy advisories lays down a concrete enforcement mechanism by adopting specific provisions for establishing a grievance redressal forum.

Failure to Regulate International Proxy Advisories

The problem with the guidelines for proxy advisories is not its enforceability but rather its exclusion. By way of the code, the regulatory agency seeks to bring only the homegrown proxy advisories under its purview, thus excluding the foreign proxy advisories that continue to play a significant role in the Indian market. For instance, two international proxy advisories – Institutional Shareholder Services and Glass Lewis & Co advised the investors to vote against the appointment of Deepak Parekh, Bimal Jalan (former RBI Governor), and Banksi Mehta to the HDFC Board; while Parekh narrowly survived the blow against him, the other two quit prior to the shareholder voting.[viii]This is an accurate illustration of the growing impact international proxy advisories exert on the Indian governance mechanism.

In light of this context, it is important that these advisories fall under the purview of the regulatory agencies in India due to several reasons. Most importantly, the guidelines issued by these proxy advisories follow the ‘one size fits all’ approach without taking into consideration what is unique to the Indian market. For instance, as per the recommendations of ISS, it recommends voting against an individual’s appointment as a director if he sits on more than six boards at the same time.[ix] While this may seem viable in a jurisdiction such as the UK, where such multiple and concurrent appointments are uncommon, it is an unviable option in India. Such appointments have become a hitherto phenomenon in the Indian corporate sector. For instance, in 2014, SEBI notified that a director could serve on the board of 7 listed companies at the same time; and as per the Companies Act, 2013, a director can currently serve on the Board of a maximum of 20 public companies. Considering the factors herein mentioned, it is essential that the international proxy advisories also face the same regulation as the domestic advisories.


An investment manager in the UK characterized the Code of Best Practice that arose out of the Cadbury Committee’s deliberations on corporate governance as the ‘greatest constitutional change in the management of British public companies since the 19th century’.It is highly unlikely that the adopted version in India will prompt any such transformation. Based on experiences in other jurisdictions such as the UK and Singapore, it is safe to bet that not too long after the code comes into full operation, a fresh wave of concern regarding its enforcement and implementation will bring the limelight back to corporate governance. On the assumption that this code will have a considerable yet limited impact, a likely by-product will be a more robust and concrete mechanism, considering the gaps and loopholes in the present regime. In 2016, the Financial Stability and Development Council (FSDC)were set up to formulate a single, uniform stewardship code for all the stakeholders across the country.[x] While fragmented codes have proliferated across the country, the approval of the FSDC for a uniform code still stands pending. Therefore, India’s present stewardship codes are to be regarded as a means to an end and not the end in itself.


[i]UK Stewardship Code, 2010.

[ii]Paul Davies, ‘Shareholders in the United Kingdom’, in Randall Thomas and Jennifer Hill (eds), Research Handbook on Shareholder Power (Edward Elgar 2015).

[iii]Guidelines on Stewardship Code for Insurers in India,2017.

[iv]Stewardship Code for all Mutual Funds and all categories of AIFs, in relation to their investment in listed equities, 2019.

[v]Procedural Guidelines for Proxy Advisories,2020.

[vi]Financial Reporting Council UK, Independent Review of FRC 2018 <> accessed 23 January 2021.

[vii]Arcot, S.R. and V.G.Bruno, ‘In Letter but not in Spirit: An Analysis of Corporate Governance in the UK’ 2006 London School of Economics <> accessed 24 January 2021.

[viii]ECTFO, ‘Just who are the proxy firms that gave Deepak Parekh such a bad scare’ Economic Times (2018) <> accessed 20 January 2021.

[ix]ISS, ‘India Proxy Voting Guidelines’, November 2020.<> accessed 2 February 2021.

[x]Indian Ministry of Finance, FSDC.

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