Given India’s importance as a large component of the emerging markets universe and its influence on the global economy, not to mention a long historical connection between the two countries, the state of stewardship implemented by asset managers is likely to be of great interest to UK investors.
India is estimated to be the largest country by population, with more than 1.4bn inhabitants. It is the world’s fifth largest economy, and it is forecast to be one of the fastest growing major economy for some time to come. It has an increasingly important role to play, not only geopolitically, but also as a growing part of the world’s capital markets.
The concepts of shareholder engagement and stewardship are not new to India, but it has (traditionally) had something of a tarnished reputation for corporate malfeasance and some high-profile ‘bad actors’. This makes it especially important to understand the attitudes and practices of asset managers operating in India as regards to stewardship.
The results of a recent survey by RisCura revealed that most Indian managers take stewardship seriously. They have incorporated responsible investing into their processes and are on par with best-in-class managers in other emerging markets. Managers were generally realistic with respect to current stewardship activities, recognising both the progress made over the past decade but also the need to further ‘move the needle’ going forward.
A key finding from RisCura’s research is that the identification and then avoidance of ‘bad actors’ is critical for long-term success as an investor in India, and this is best done with on-the-ground, local knowledge and expertise. Most Indian companies are controlled by a ‘promoter’ (typically a founding family) whose actions particularly regarding the treatment of minority shareholders are a material determinant of the ultimate investment outcome. Thorough research of the promoter is essential to avoid ‘bad actors’, and skipping the governance ‘bombs’ that eventually explode as a result. Getting this right will ensure good long-term performance. Where a ‘bad actor’ is identified, fund managers prefer to completely avoid investing in the company even if this introduces substantial benchmark deviation in the interim.
Governance is the cornerstone of Indian ESG priorities, with due diligence of the promotor again taking centre stage. The research identified climate change as the most important environmental issue but it has historically been hampered by a lack of disclosure and information. Regulatory changes driven by the Securities Board of India are seeking to address this which should foster more effective engagement. Renewable energy is increasing in the overall energy mix but this can come with considerable social implications connected to land acquisition and the displacement of people. India has multiple complex social challenges including rural poverty, widespread subsistence agriculture and a caste system. Asset managers tend to stay clear of social engagement beyond labour practices and supply chain risks, leaving companies to spend on corporate social responsibility which is compulsory in India. With increasing digitisation of the economy, asset managers consider data privacy to be highly relevant for companies in the future.
In common with Indian culture more generally, asset managers prefer to avoid confrontation. Hostile shareholder actions are rarely seen and were frowned upon by survey respondents. There is a strong preference for face-to-face engagement and usually a manager does so alone although collaboration between managers is increasing, particularly around environmental and other industry-wide issues.
The Indian market in general poses a number of challenges for foreign asset managers. As a result, when foreign asset managers do operate in the market, it is often through joint ventures with local firms. However, foreign asset managers have an out-sized influence on responsible investment implementation by introducing global best practices which local firms need to respond to in order to remain competitive.
The Securities Board of India scored highly in most managers’ opinion. Corporate governance codes, disclosure requirements and the introduction of a mandatory stewardship code were all given as examples of an active and effective regulator. The legal and tax systems in India, however, are often regarded as antiquated, cumbersome, and slow, despite being generally perceived as unbiased.
Proxy voting is fully automated and very effective. Voting of proxies by mutual funds is mandatory and the entire system works very well. Other emerging markets could do well by emulating the Indian model.
Taken together, the research showed that Indian asset managers treat stewardship and active engagement seriously, but need to adapt their approach to the local environment. For example, there is little to be gained from aggressively taking on a promoter with a majority shareholding and in this case avoidance – even at the cost of short-term underperformance – is the best option. The relative importance of ESG headings is also quite different to those faced by asset managers in the UK. Having a better understanding of the stewardship practices among Indian managers will help UK investors demystify and debunk many of the preconceptions about allocating to India, which is likely to improve their portfolio outcomes over time.
Lars Hagenbuch, Investment Product Specialist at RisCura
