Markets regulator Securities and Exchange Board of India (Sebi) on Friday came out with guidelines on votes cast by mutual funds to further improve transparency and encourage such fund houses to diligently exercise their voting rights in best interest of the unit holders.

Mutual funds, including their passive investment schemes like index funds and exchange-traded funds (ETFs), will be required to cast votes compulsorily in respect of related party transactions of the investee companies and corporate governance matters, says a Sebi circular.

Mutual funds will have to cast votes on corporate governance matters, including changes in the state of incorporation, merger and other corporate restructuring, and anti-takeover provisions as well as capital structure, including increases and decreases of capital and preferred stock issuances.

Casting of votes would be necessary for stock option plans and other management compensation issues, social and corporate responsibility issues, appointment and removal of directors and any other issue that may affect the interest of the unit holders.

In case of the mutual funds having no economic interest on the day of voting, Sebi says it may be exempted from compulsory casting of votes.

The vote would be cast at the mutual fund level. In case the fund manager of any scheme has a strong view against the views of fund manager of the other schemes, the voting at the scheme level would be allowed, subject to recording of detailed rationale for the same, says the regulator.

Fund managers need to submit a declaration on a quarterly basis to the trustees that the votes cast by them have not been influenced by any factor other than the best interest of the unit holders.

Further, trustees in their half-yearly trustee report to Sebi would confirm the same. The guidelines will be applicable with effect from April 1, 2021.