Proxy firms play by new rulebook as Sebi tightens procedural guidelines

Firms that advise investors on how to vote on shareholder resolutions floated by listed companies will now be regulated more closely after the Securities and Exchange Board of India's (Sebi's) issuance of so-called procedural guidelines.

The new framework is aimed at increasing accountability, addressing conflict of interest, and establishing greater communication between proxy advisors and their clients and the company. More importantly, Sebi has allowed India Inc to present its counterview and has also put in place a grievance redressal mechanism.

Proxy advisors are firms that give voting recommendations on resolutions floated by companies to their clients, who are typically institutional investors, such as mutual funds and private equity investors. Their advice influences shareholders' vote on top executive compensation or reappointment of directors or how listed firms structure the related party transaction. Given their growing clout, it is not uncommon for them to be at loggerheads with India Inc when it comes to contentious issues.

Heads of proxy firms say are already playing by the new rule book. “We welcome Sebi’s new guidelines. These are procedural and consistent with what we have been practising — be it disclosures, managing conflict, or transparency. It is difficult to say how corporates will react to critical recommendations in future. Suffice to say, from our side, we’ve been transparent since we started operations,” says Amit Tandon, founder and MD, IIAS.

Sebi has said it will now examine non-compliance by proxy advisors if listed firms approach it with grievances. Some believe this may increase the scrutiny on the reports issued by proxy firms. This may, in turn, increase the cost for them.

"The vote recommendation reports cannot be considered adversarial as they are informed opinions that are research inputs to institutional investors. Investors choose to act or not act on our recommendations. And, these opinions are primarily in the private domain.  We already adhere to many of these guidelines in some form or other. The overall guidelines will enhance costs for proxy advisory firms. Over the past 10 years, proxy advisory firms have contributed to improving good governance in the country, and this seems to be lost on the regulator," said Shriram Subramanian, MD, InGovern.

 

 

Sebi’s move to tighten regulations around proxy advisors comes close on the heels of a similar move by its American counterpart Securities and Exchange Commission (SEC).

Last month, the SEC approved new rules that were seen to rein in the influence of proxy advisors. Just like the SEC, Sebi has asked proxy advisors to share their recommendations with listed firms at the same time as clients.

Sebi has directed proxy advisors to formulate voting recommendation policies and disclose them to clients. Industry players said it is important than ever before to formulate a code of conduct and adhere to it.

"I don't think it will be easy for corporates to make life difficult for proxy advisories for the simple reason any complaint with Sebi will not stand if we are adhering to the code of conduct. We are quite confident that we will comply with the conduct. Corporates will have some problem with us if we come out with some recommendations against their resolution. But there won't be problems if we explain our rationale and wherever the law restricts us, we say this is the law and this our policy," said JN Gupta, MD, Stakeholder Empowerment Services.