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Sebi's expert panel proposes framework for proxy advisory companies

The recommendations made by the six-member panel headed by Sandeep Parekh, founder of Finsec Law, aim to manage conflict of interest and ensuring independence

Samie Modak  |  Mumbai 


An expert panel constituted by market regulator Securities and Exchange Board of India (Sebi) on Monday proposed a detailed framework for proxy advisory firms, who provide voting recommendations on resolutions floated by listed companies to their minority shareholders — typically institutional investors. The recommendations made by the six-member panel headed by Sandeep Parekh, founder, Finsec Law Advisors, are aimed at managing conflict of interest and ensuring independence.

The committee has also proposed more scrutiny of global proxy advisory firms, whose role and obligations while advising in case of domestically listed companies had come under question after their controversial recommendation on resolutions floated by HDFC, which included reappointment of Deepak Parekh as a director.

The panel has said all proxy advisors should have a publicly available conflict of interest policy, which will have a clear approach on managing concerns relating to independence that could impact their recommendations provided to clients.

The panel recommended proxy firms have clear separation between the proxy voting advice to shareholders and the advice to listed companies regarding advisory services. Proxy firms need to also outline a policy to determine when not to provide a voting recommendation. The panel has said the board of proxy advisors should be independent of its shareholders, where such a position creates a serious conflict of interest.

The panel has also proposed that all proxy firms disclose the methodologies and processes used in the development of their research and recommendations. In other words, proxy firms will have to provide rationale and justifications for recommendations made by them.

The expert group has also suggested that proxy advisory firms should refrain from offering any other remunerative services and should only give voting recommendations.

On the issue of mandating global proxy firms register locally with Sebi, the committee members have submitted diverse views, which include making registration mandatory or asking them to enter into agreements with their domestic proxy firms.

The panel, however, has recommended against making registrations mandatory for foreign firms as ‘it would be unfair to subject global proxy advisors to regulations by 195 countries’.

Instead, the expert group has said should provide a code of conduct to be followed by foreign proxy advisors.

“These should be principle based and focused on broad principles of fairness, disclosure, and conflict and based on comply or explain basis,” the report says.

Currently, domestic proxy firms are regulated under Sebi’s (Research Analysts) Regulations, 2014.

The expert panel has also recommended introduce a stewardship code, which is not just restricted to mutual funds but to all institutional investors. The market regulator has invited public feedback on the report by August 18.

First Published: Mon, July 29 2019. 19:17 IST