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Unit Trust of India (UTI) has had second thoughts on appointing nominees on boards of entities in which it owns substantial equity (more than five per cent). This despite the fact that no corporate has categorically declined a board slot to India's largest mutual fund. This very restraint in corporate response may have led UTI to explore, as a first step, the option of increased interaction through corporate presentations to it. Corporates, according to feedback received by UTI, are willing to enhance presentations to keep it informed on a par with term-lending bodies. This should ensure interaction between corporates and UTI's equity analysts. However, it follows that UTI will seek board positions in firms which do not play ball. The very appointment of a nominee will be a stigma on a firm; markets will treat this as an adverse signal. Viewed thus, UTI's decision not to push its nominees on corporate boards is sound: this should ensure good corporate governance and promote transparency.
Investors,including mutual funds, had welcomed the idea of UTI's presence in virtually every board (given the spread of its equity investment). They are bothered about corporate governance, understandably so, in a country where industries go sick but their controlling interests flourish. Irrespective of whether their share prices are firm or weak, management leaves much to be desired in many firms. But it was also recognised that UTI would be in a minority on many boards; to be effective, it would have to be in an adverserial relationship with the controlling interests-to the detriment of smooth functioning of the companies. And where things are really bad, as a minority stakeholder, it might rarely secure board majority to enforce a change in management. True, UTI could join hands with nominee directors of term-lending institutions, but the interests of investor and lender may not always coincide. UTI's alternative of selling equity of firms with recalcitrant managements would work only if disinvestment exceeded wellover five per cent; modest sales would not bother managements with ulterior motives. Besides, UTI, like other funds, is gradually bringing its investments to 10 per cent of equity of firms. A related point is that membership on boards is likely to expose UTI to charges of insider trading, unless information presented to the board is simultaneously released, as in US, to the Press and public. The key issue is transparency, and not just passing on relevant information to equity analysts of UTI. Like UTI, other mutual funds, and individual investors should enjoy interface with corporates. Crony capitalist relationship with powerful institutions must be thwarted. UTI can only speak for itself; Sebi should take up from where UTI has left off.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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