The Stewardship Role of Independent Directors

At the recent IOD western regional conclave, Shri Amarjeet Singh (WTD - SEBI) used the platform to underline a fundamental shift taking place in India’s capital markets — one that has profound implications for corporate governance, boardroom accountability and the way companies are steered. Drawing on fresh data from the NSE ownership tracker, his plenary highlighted how ownership patterns have evolved over the past decade and argued that regulators, investors and companies must move beyond form-filling compliance to substantive stewardship.

What the numbers tell us

The NSE ownership tracker data cited by Shri Singh paints a clear picture of growing institutional presence in listed Indian companies. Over the last ten years, mutual fund shareholding has increased from 3.9% to 10.6%. More broadly, institutional investor ownership has climbed to roughly 18% from 10% in the same period. Parallel to this trend is the steady strength of promoters — promoter ownership in the Nifty sits at about 40.2%, with the broader market’s promoter stake close to 50%.

Two important implications flow from these facts. First, domestic institutional investors (DIIs) and mutual funds are becoming large and influential owners; in India today DIIs collectively outweigh foreign institutional investors (FIIs). Second, promoters remain dominant in many companies, which shapes the power dynamics on governance issues and the practical scope for investor engagement.

From policy to practice: SEBI’s stewardship push

Recognising the market shift, SEBI has been encouraging mutual funds and DIIs to adopt a stewardship role. The regulator has asked these investors to disclose their positions and be more transparent about how they exercise ownership rights. In line with this, SEBI has introduced a stewardship code for DIIs that lays out guiding principles for engagement, conflicts management and disclosure.

The intent is simple: large, long-term domestic investors should do more than just hold shares; they should actively engage with companies on strategic, governance and remuneration matters that affect long-term value. But as Singh emphasized, the code is only the beginning — what matters is the substantive playout of Listing Obligations and Disclosure Requirements (LODR), not merely a compliance play-out.

Focus areas where DII engagement matters

Shri Singh called out specific areas where DIIs step up engagement and where better disclosure from companies and investors would materially improve outcomes:

- ESOPs: Large equity compensation programmes can dilute existing shareholders and raise questions about alignment with long-term value creation. DIIs should scrutinise design, performance conditions and quantum of grants, and push for clear disclosure.

- Slump sales and major asset transfers: These transactions can have lasting strategic and valuation consequences. Institutional investors should ask for rigorous valuation narratives, independent fairness assessments and clear post-transaction plans.

- Related party transactions (RPTs): RPTs are a perennial governance risk, particularly in promoter-led companies. Active owners should seek robust rationale, independent approvals and transparent terms.

- Directors’ remuneration and board composition: Executive pay, non-executive director independence and board refreshment are core stewardship topics. DIIs should exercise voting rights decisively and engage with nomination and remuneration committees when issues arise.

Why engagement must be substantive

Shri Amarjeet Singh’s refrain was that compliance alone will not deliver better corporate governance. The LODR regime provides a framework — disclosures, approval thresholds, mandates for independent directors — but these rules are only as effective as the investors and boards that apply them. A “compliance playout” — checking the boxes to satisfy regulatory requirements — can leave material governance issues unaddressed. Instead, stakeholders need “substantive playout”: observable, outcome-oriented interventions that change company practices and protect long-term shareholder value.

What substantive stewardship looks like

Substantive stewardship involves actions and measurable outcomes, not just policies. Some practical elements include:

- Transparent voting and engagement records: Investors should publish their voting records and a summary of material engagements, including issues raised, management responses and outcomes.

- Coordinated engagement where needed: For systemic issues, investors acting together can be more effective, while retaining independence where conflicts or strategy differ.

- Escalation frameworks: Clear paths for escalation — from meetings to public letters to proposing board changes — help ensure engagement has teeth when needed.

- Outcome measurement: Trackable metrics such as changes in disclosure quality, revisions to executive pay, governance reforms or delays/withdrawals of contentious transactions.

- Alignment with beneficiaries: Asset managers and trustees must demonstrate how stewardship actions align with the interests of end investors, particularly in pooled vehicles like mutual funds.

Singh urged a structured study into how DIIs engage with managements across the market. Such a study should map current practices, barriers to engagement and the effectiveness of interventions. Key questions to examine include:

- How frequently do DIIs meet managements and boards on governance issues?

- What issues prompt engagement most often, and what outcomes follow?

- Do DIIs vote differently from FIIs and retail holders, and why?

- What operational, legal or incentive constraints limit DIIs’ willingness to escalate?

- How do stewardship practices vary by type of DII (insurance companies, provident funds, mutual funds, pension funds)?

Answers would inform regulatory refinement, market best practices and the design of effective stewardship frameworks.

Challenges and the way forward

There are real challenges. DIIs operate under varied mandates, regulatory constraints and incentive structures. Some may face conflicts when related entities hold stakes in companies, or when short-term performance pressures discourage activism. Coordination among many institutional holders is difficult, and legal frameworks around proxy voting and escalation can be cumbersome.

Nonetheless, the market cannot afford inaction. As DIIs and mutual funds grow their share of listed companies, their collective behaviour will increasingly determine governance norms. SEBI’s stewardship code and disclosure expectations are important steps, but they must be supported by clear implementation, public reporting of engagement outcomes, and continuous capacity building within institutional investors.

Conclusion

The combination of rising mutual fund and DII ownership and enduring promoter stakes creates both an opportunity and a responsibility. Amarjeet Singh’s message at the IOD conclave was plain: India’s market must move from formal compliance to substantive stewardship. Investors should embrace an active ownership role — scrutinising ESOPs, RPTs, slump sales and remuneration — and regulators, companies and market bodies should enable and measure engagement outcomes. A focused study on DII engagement practices would be a timely input to refine policy and build the habits of stewardship that long-term market participants and beneficiaries expect.