Sebi working group suggests 'comply or explain' regime for proxy advisory firms

Suggesting a 'comply or explain' approach for proxy advisory firms, a Sebi-appointed working group has pitched for a regulatory framework wherein listed companies aggrieved by the view of such entities can approach the watchdog for redressal.

Sebi has sought public comments on the recommendations made in the group's report till August 18.

"The proxy advisor should take appropriate steps to manage, mitigate and/ or disclose any potential conflicts of interest resulting from ancillary business activities. Creation of 'Chinese Walls' between proxy firms and their consultancy firms. There should be clear procedures to handle conflicts of interest," the report said.

While noting that no further mandatory regulation is required, the group has recommended amendment to regulations that would allow listed companies, aggrieved by a view of a proxy advisor, to approach Sebi for redressal of their grievances.

"Sebi may consider drafting a code of conduct for proxy advisors which may include the following on a 'comply or explain' basis," the report said.

Another suggestion is that disclosure of conflict of interest should appear on every specific document where the proxy advisory firms are giving their advice.

"A generic disclosure/disclaimer on the proxy advisor's website is inadequate and it should be extended to every place, including news quotes where a proxy advisor makes a statement.

"Disclosures should especially address possible areas of potential conflict and also the safeguards that have been put in place," it noted.

Besides, the group has suggested that institutional investors like Foreign Portfolio Investors, Portfolio Managers, Alternative Investment Funds, Real Estate Investment Trusts, and Infrastructure Investment Trusts could be mandated to ensure that proxy advisory firms employed by them have appropriate capacity and capability to issue proxy advice.

The working group on issues related to proxy advisors was set up in November 2018.