Sanika Kulkarni, Tamil Nadu National Law University
Introduction
“The institutional investor remains the bigger influence on individual trades simply because the institutional investor has more money to support the order and that will have more of an impact on the stock.” -Maria Bartiromo
Meaning and overview:
Institutional investors mean a large group or organization that invests money in the capital market and acts on behalf of its members or clients. The world bank in its report has mentioned that, “institutional investors are defined as entities that pool money from various sources to invest in different asset classes, with the intent of generating profitable returns on their investment. Institutions or funds that are primarily in the business of making financial investments, but are implementing projects through specially formed subsidiaries on an exceptional basis, are also considered institutional investors.” 2 It consists of and includes pension funds, mutual funds, hedge funds, commercial banks, insurance companies, etc. In the light of India, the Satyam Case is a good example supporting the need for stronger corporate governance principles and more involvement of the institutional investors in the company affairs so as to maintain principles of Corporate Governance. In the Satyam scandal, all the decisions were taken by the management without any discussion or proper disclosure to the investors of the company, which led to them facing a huge loss of over 5000crore. It was this huge scandal that has led to the need for the institutional investors to be actively involved in managing the affairs of the company. Usually, the institutional investors are not much involved in the management and operation of the company. All public-companies and corporations must be cautious while selecting executives and top-level management. These are the people that set the tone for the working of the corporate. If there is corruption at the higher level, it will surely trickle-down. The activity of board of directors needs some control in the form activism on part of the institutional investors. The main issue here is to try to figure out whether institutional investors should play an active role in the decision-making process of the company.
