Test case for India's proxy advisory firms

The still nascent proxy advisory sector in India is set to face its toughest test with the recent Rs 1,000 crore legal suit filed by ITC in the Calcutta High Court against Institutional Investor Advisory Services (IiAS) over allegations of defamatory statements. However, some still see a silver lining to the development. According to Shriram Subramanian, founder and managing director, InGovern Research Services, the lawsuit only represents the increasing influence of proxy advisory firms in India. While some experts have questioned the intent of the exercise, others have been critical of the wide scope of India's defamation laws. 

Alok Prasanna Kumar, senior resident fellow, Vidhi Centre for Legal Policy, is of the view that the issue is more to do with procedure, than the laws themselves. "A suit or criminal case alleging defamation is filed usually with the intent to harass and economically bleed the opponent, rather than clear one's reputation. Such cases are described as SLAPP (strategic lawsuit against public participation) in the US,” notes Kumar.

One of the main duties of proxy advisory firms is to issue voting recommendations for shareholders on board resolutions put out by companies. 

The idea is to enhance corporate governance and empower minority shareholders and institutional investors.

Proxy advisory firms came into existence in India in the wake of the Satyam Computers issue, after which the Securities and Exchange Board of India (Sebi) made it mandatory for corporate entities to undertake voting on several high profile resolutions. Globally, proxy advisory firms have been in existence for 30-odd years. 

Some of their job roles include agenda translation, identification of related party transactions, voting policy development, etc. They are also entrusted as independent analysts with issues involving appointment of directors, auditors and audit committees and provide opinions on executive remunerations in line with governance requirements in various company laws. 

In line with Sebi's commitment to corporate governance, the regulator introduced the Sebi (Investment Advisors) Regulations in 2013 and followed it up with the Sebi (Research Analysts) Regulations in 2014. The 2014 regulations lay down a complex system of duties, checks and balances that regulate the proxy advisory sphere (see box).

“India is the only jurisdiction in the world where proxy advisors are regulated. The USA, Canada, the UK and the European Union have tried in past, to bring out concept papers on regulating proxy advisors. However, they have always shielded away from making any regulations. Instead, they all have guidelines,” says Jitendra Nath Gupta, co-founder and managing director, Stakeholders Empowerment Services.

Nonetheless, critics of an unregulated proxy advisory sector have time and again raised concerns over such advisors acting on behalf of both promoters and shareholders, creating conflicts of interest. There have also been concerns over the methodology and accuracy of information provided, transparency-related issues and accountability. 

Recently, the US has introduced a Bill to regulate the sector formally. The Bill is the fallout of several allegations of overreach by proxy advisors. Many US corporates feel these firms prejudicially influence voting trends and have a negative impact on business worthiness.  The proposed legislation introduces features such as federal registration, right of corporate review before making investor advice, providing advance copies, disclosure of research methodologies, among others. 

Experts say some of these proposals are similar to the Sebi's 2014 regulations. Nonetheless, Gupta emphasises on the different role played by Indian proxy firms when compared to their international counterparts. “In India, proxy firms do not lobby, they do not canvass for votes, and they do not carry out the agenda of any interested party, which is quite common in other jurisdictions,” adds Gupta.

Even in the US, opponents of the Bill say any such move will weaken corporate governance, reduce independence and undercut the fiduciary obligations of proxy firms. The domestic proponents of a vibrant proxy advisory framework have also called for enhanced support by Sebi, which could also implead itself in the ongoing case, say experts. 
 

         Regulating the proxy firms

• A snapshot of the Sebi (Research Analysts) Regulations, 2014
• Definition of proxy advisor: Person who provides advice to institutional investor or shareholder on public offers or voting on agenda items
• Certification requirement: Proxy advisors have to obtain registration certificate issued by Sebi
• Capital requirement: Minimum asset value of Rs 1 lakh for individuals and Rs 25 lakh for corporate body
• Management of conflicts of interest and disclosure requirements: Establishment of internal policies for dealings of proxy advisors, limitations on trading, rules on compensation, limitations on publication, adequacy of documentary research, etc.
• Additional disclosures by proxy advisor: Duty to disclose extent of research, ensure accuracy of issuer data and disclosure of issuer policies
• Inspection by Sebi and power to issue directions: Board may inspect books of records, documents of proxy advisors and issue directions in the interest of securities market or investors