In markets, for every buyer there is a seller and for every seller a buyer. Even as India?s market regulator, the Securities and Exchange Board of India, worries about the retail investor deserting the equity market, two sets of investors have stepped in to fill this gap. First are ?promoters? who have increased their shareholdings in companies they manage and second are the institutional investors. On average, each has increased its holdings by 10% since 2001. You can slice and dice these numbers to get more granular data (and those interested can read Professor Balasubramanian?s IIM Bangalore working paper 419).
How a Birla or a Goenka or a Jindal or a Tata think about businesses is no doubt different. And while no two promoters are alike, most?if not all?did realise that if they needed to continue to exercise control, they had to increase their shareholding in companies, which is what most have spent the last 15 years doing.
Institutional investors are the second category who stepped in to buy from retail investors. These institutional investors are a far more heterogeneous set. It comprises mutual funds, hedge funds, insurance companies, private equity or sovereign wealth funds. They all raise money from retail and at times from high net-worth investors or even other institutional investors. For the most part manage money on behalf of others though at times they may manage their own funds.
Earlier investors were classified as being market-, politically- or socially-driven. But as the markets have become more sophisticated, the classification has become more nuanced. This is based on the purpose of the institution and its investment strategy, its liability structure, its fee structure, and organisational structures?limited company, private company, trust, partnership, etc.
An insurance company or a pension fund, whose liabilities tend to be far more long-term in their outlook. This is why the development of a robust insurance sector is the sine qua non for the development of infrastructure. Contrast this with a hedge fund?which might choose to be more event based with regard to its investment strategy. Again, the pressures on the mutual funds, with daily NAVs, are very different from a private equity funds, which has negligible pressure to disclose its portfolio or a sovereign wealth fund, which is not burdened by this need at all. The stress of redemption implies mutual funds invest in liquid shares; private equity with a longer horizon can afford to be patient and invest in unlisted companies.
Serdar Celik and Mats Isaksson from the Organisation for Economic Co-operation and Development (OECD) have found that the purpose of the institution, its liability and fees structure, disclosures will also determine their engagement with companies in which they invest.
The two have pointed out that index funds charge lower fees than an active one, hence tend to be more passive with regard to company engagement. Activist funds hope that staring down on company managements and getting them to change strategy will drive up share price. Private equity, with a larger slice of the performance pie, has money to demand a seat on the board and debate each operational decision with management teams. But while you can slice and dice funds, and their engagement levels, there is a far simpler framework for viewing various players in the market: all are intermediate investors. This has just one consequence: they all have a fiduciary responsibility to their investors.
An important aspect of this fiduciary duty is to invest in companies and assets and to optimise returns while protecting the downside. This can happen only when investors choose to invest in well-governed companies. So, irrespective of their investment philosophy, investors need to engage with companies through cycles?and not sell holdings on adverse governance events. While each type of entity will determine its engagement level based on its DNA, the one thing all investors can do easily is to vote on shareholder resolutions. In fact, e-voting ensures this does not cut into an investor?s time or dent the wallet. This implies institutions can no longer take cover of their institutional structure, to not vote. With the new Sebi guidelines restricting voting on related parties, the vote will matter and companies will have no option but to start listening to what investors are saying. Mutual funds have started to vote. Now the insurance companies, pension funds and all other institutional owners must do so.
The author works with Institutional Investor Advisory Services India Limited (IiAS), an advisory firm