Proxy advisers have gained prominence over recent years in relation to corporate governance matters and have become an integral part of shareholder activism in India. Proxy advisers provide advice to institutional investors and shareholders of companies in relation to the exercise of their rights in the company, including recommendations on public offers or voting on agenda items.
Proxy advisers enable minority shareholders to participate effectively in corporate governance decisions and assist them in voting on resolutions. They act as a critical intermediary by providing shareholders with well-researched insights which help in companies' decision-making processes. Recommendations made by proxy advisory firms also assist institutional investors in making investment decisions.
While the Securities and Exchange Board of India (SEBI) requires proxy advisers to register with it pursuant to the SEBI (Research Analysts) Regulations 2014 (RA regulations) and abide by the code of conduct set out under Regulations 24(2) and 23(1) of the RA regulations, there was traditionally no standardised process for proxy advisory firms to follow when performing their activities (ie, making voting recommendations). As a result, proxy advisory firms adopted their own set of processes and standards.
SEBI's Procedural Guidelines for Proxy Advisers
In order to standardise the process across proxy advisory firms, on 3 August 2020(1) SEBI issued its Procedural Guidelines for Proxy Advisers, which will apply with effect from 1 September 2020. The guidelines focus primarily on conflict of interest, transparency and disclosures. As per the guidelines, proxy advisers must:
- formulate voting recommendation policies and disclose updated voting recommendation policies to clients. Proxy advisers must review these policies at least once a year;
- disclose the methodologies and processes followed in the development of their research and corresponding recommendations to clients;
- alert clients, within 24 hours of receipt of information, about any factual errors or material revisions to their report;
- share their report with clients and the company at the same time. All comments and clarifications received from the company, within a timeline as may be defined by proxy advisers, must be included as an addendum to the report. Further, proxy advisers must either revise the recommendations in the addendum report or issue an addendum to the report with their remarks, as considered appropriate, in case the company has a different view point on recommendations stated by the proxy adviser in its report;
- disclose in their recommendations the legal requirement with regard to higher standards that they are suggesting (if any) and the rationale behind such recommendation;
- disclose any conflicts of interest on every specific document where they give advice. Such disclosures should especially address possible areas of potential conflict and the safeguards that have been put in place to mitigate possible conflicts of interest; and
- establish clear procedures to disclose, manage and mitigate any potential conflicts of interest resulting from other business activities, including consulting services, if any, undertaken by them and disclose the same to clients.
Grievance resolution between listed entities and proxy advisers
Due to the inherent nature of proxy advisers' work, proxy advisers and listed entities may have different views on any agenda item of the listed entity. Consequently, listed entities may have grievances against proxy advisory firms.
In response to this issue, on 4 August 2020 SEBI issued a circular to provide a procedure for the resolution of grievances between listed entities and proxy advisers.(2) As per the circular, listed companies may now approach SEBI in order to seek resolution of their grievances against SEBI-registered proxy advisory firms. SEBI will examine whether the proxy advisers have not complied with the code of conduct set out under the RA regulations and the guidelines.
Endnotes
(1) Further information is available here.
(2) Further information is available here.
