SEBI Tightens Reins over the Proxy Advisory Industry

Proxy advisory firms have acquired the status of an important corporate governance intermediary. This is not just globally, but also in India. They play a crucial role of providing voting advice to shareholders (particularly of the institutional variety). In India, the advent of the proxy advisory industry over the last year has invigorated the active participation of institutional shareholders in the exercise of voting rights at shareholders’ meetings of companies.

Given the impact that proxy advisory firms could have on corporate governance of companies, questions have arisen about whether (and the extent to which) proxy advisory firms must be subject to regulatory supervision. The initial stance of the Securities and Exchange Board of India (SEBI) was to refrain from intervention. However, when it did so, SEBI subjected proxy advisory firms to oversight through the SEBI (Research Analysts) Regulations, 2014 (as extensively discussed in this paper). More recently, there have been further calls to streamline the regulation of proxy advisory firms.

It is in this background that SEBI yesterday issued a set of Procedural Guidelines for Proxy Advisors, which will operate in addition to the existing guidelines under the SEBI (Research Analysts) Regulations. The new guidelines require proxy advisory firms to formulate voting recommendation policies and update them annually. This is apposite given that one of the criticisms globally against proxy advisory firms is that the guidelines are too general and to not cater to specific nuances, which the updates can take account of. One significant procedure relates to the fact that while sharing their report with their clients, the proxy advisors must simultaneously share it with the company. This will enable companies to respond or clarify on issues raised in the report, which must be considered by the proxy advisors in updating or supplementing the report, as appropriate.

It is often the case that proxy advisors recommend governance standards that are higher than what the law stipulates. Hence, they are now required to explain the justification for such higher standards. At least globally, the need for more stringent regulation of the proxy advisory industry is the possibility for conflicts of interest in their recommendation. SEBI follows the usual practice of transparency in case of conflicts, and now requires proxy advisors to disclose possible areas of conflicts, and the measures they have adopted to address such conflicts.

The additional guidelines will take effect from 1 September 2020. Greater transparency and oversight will certainly enhance the quality and credibility of the sector. However, the guidelines also add considerable steps such as disclosure to companies and receipt of responses from them, which might not only bring about possible delays in the process, but also diminish the clarity of the proxy advice. Complex as they may tend to become, the set of checks and balances would ultimately mean that institutional investors will have to make the ultimate determination based on the proxy advice and the company’s response, and take responsibility for their decisions.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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