According to Kotak Mahindra Mutual Fund chief executive Chandrashekhar Sathe, there is bound to be a dramatic increase in institutional holdings in the coming years which will result in the role of funds increasing.

At present, a rough estimate indicates that FIIs owned shares worth about Rs 40,000 crore. The total assets under management with MFs, including UTI, are of the tune of Rs 1,07,000 crore. Even if the stocks owned by LIC, GIC and the financial institutions including banks are added, the total institutional equity holdings (including FIIs) may not exceed 10 per cent of the market cap.

This figure would be even far lower if FIIs who represent foreign savings are excluded. Thus from this low base as public savings come into mainstream investments, there is bound to be a dramatic increase in institutional holdings.

In the US, 50 per cent of all listed corporate stock is held by institutional investors (about 60 per cent of the largest 1,000 corporations). The special impetus will come from pension/provident fund reforms and tax-deferral benefits to the funds. "We in India still live in a fool's paradise of a state fund economy. Despite all the procrastination by the political powers, privatisation of government ownership is inevitable."

Mr Sathe said. With businesses in the near future being run by private enterprises but owned by public savings, the ownership in the course of time will fall into the laps of institutional fund managers, both domestic and foreign.

Therefore institutional investors would have to shoulder the responsibility of enlightened shareholders, keeping the promoters and managers on their toes. According to Mr Sathe, the key role of institutional investors would become understanding of good corporate governance and how to apply pressure or persuasion.

The factors affecting institutional activism in India are the cost of activism itself and many institutions believe they are investors in the company and neither do they possess skills to actively participate in the company. Besides, some institutions also don't think it is part of their job to involve themselves in such activism.

The other important factor is the size of the holding of the funds.The relatively small size funds tend to be more focussed on trading in the market. Says Mr. Sathe " Perhaps , it is for this reason none of the funds have yet spelled out their policy regarding the exercise of shareholder rights which they hold by implied proxy". There is also the issue of a conflict of interest, since the institutional investor may have current or potential business relationships with the companies which make them reluctant to curb management decision-making in India, says Dr Jinesh Panchali, faculty at the UTI Institute of Capital Markets.