Over the last decade, India has witnessed considerable shareholder activism in that shareholders, particularly institutions, have become more active in exercising their corporate franchise. Proxy advisory firms have formed an integral part of this movement, as they provide advice to both institutional and individual shareholders on how they may exercise votes at shareholder meetings of companies. There are now three homegrown proxy advisory firms, which are active in the Indian markets.
In this background, the question of whether such proxy advisory firms must be regulated comes to the forefront. In a paper, I had argued for some form of regulation of proxy advisory firms, particularly given the extensive impact of their advice on the markets and the possibility of conflicts of interest. This view was initially met with considerable resistance. But, matters advanced very quickly when proxy advisors were required to register with the Securities and Exchange Board of India (SEBI) under the SEBI (Research Analyst) Regulations, 2014 instead. In that sense, although there was no specific set of regulations governing proxy advisory firms, they were regulated in terms applicable to research analysts.
Since then, not only has the influence of proxy advisors risen with the growing wave of shareholder participation in decision-making of Indian companies, but this field has also witnessed the involvement of the international proxy advisory firms in the Indian markets. The international proxy advisory firms played a crucial role in a number of high profile corporate situations, thereby creating some further controversy over whether they ought to be brought within the purview of the Indian securities regulator.
It is in this context that a “Report submitted by the working group on Issues related to Proxy Advisers (PA)” assumes importance. Chaired by Mr. Sandeep Parekh, the working group reviews the landscape governing the proxy advisory industry in the light of worldwide efforts to determine whether the industry ought to be regulated. As the report notes, India is unique in its extent to which the industry is regulated, as most other countries do not impose any specific form of regulation on proxy advisory firms. The working group raises several issues regarding the regulation of these intermediaries and sets out both sides of the arguments before finally laying down the views of the working group on the specific issues.
In a nutshell, the working group does not recommend significant regulation of proxy advisory firms, but rather to establish a set of standards or a code of conduct that would set out the expected behaviour. It adopts a rather voluntary principles-based approach to a mandatory rules-based approach. This is understandable given the nascence of the industry in India. Moreover, since there are only three players, thereby creating an oligopolistic situation, imposing heavy regulations will raise the bar for new entrants and consequently further entrench the incumbents. The working group recommends only a single change to legal regime in the form of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to provide for a grievance redressal mechanism for breaches by the proxy advisors of a code of conduct.
When it comes to regulating foreign proxy advisory firms, the working group adopts a similar light-touch approach in extending the code of conduct to those firms as well. Of course, given the extraterritoriality considerations, questions arise on how one deals with recalcitrant firms. Here, the working group seeks to rely on SEBI’s multilateral arrangements with other securities regulators through IOSCO to reign them in. It finds no need to enact a separate law for this purpose.
The working group report is timely and helpful as it joins the chorus of efforts to consider the manner in which proxy advisory firms are to be regulated. In recommending a voluntary code-based approach, its efforts are incremental in nature rather than radical. But, it remains to be seen whether such an approach ends up being a slippery slope which then leads to more stringent regulation. In closing, it is worth mentioning that the working group report does not seek to deviate from the current path of regulating proxy advisory firms on the same basis as research analysts, but this requires further consideration due to the difference in the nature and function of the two types of securities market intermediaries.