Money & Banking

SEBI to issue special guidelines for proxy advisory firms

Our Bureau Mumbai | Updated on July 29, 2019 Published on July 29, 2019

Regulator seeks public comments on the proposals by August 18

Proxy firms, which advise shareholders mainly on corporate governance-related issues and assist them in voting on resolutions, will be fully regulated by SEBI now.

They will have to disclose any conflict of interest they have in giving recommendations in favour or against a company, and will have to make adequate disclosures regarding their business model and companies aggrieved by their view may be able to approach SEBI for redressal. These are some of the recommendations on which SEBI is seeking public comments.

On Monday, SEBI put out a discussion paper after the Sandeep Parekh-led committee submitted its suggestions to the regulator. JN Gupta, former executive director of SEBI, who now runs a proxy advisory firm was also part of the committee.

For the past few years, proxy advisory firms gained prominence as they brought out several key corporate governance-related issues in companies such as related-party transactions, high pay packages to board members and even misgivings on independent directors. But companies were often annoyed with their observations and approached SEBI. So far, proxy advisors came under the ambit of stock market analyst rules but this will be first time that special regulations are being framed for them.

Conflict of interest

The Parekh committee has now recommended that SEBI may consider drafting a code of conduct for proxy advisors which may include disclosure of conflict of interest and how it is managed. The proxy advisor should take appropriate steps to manage, mitigate and/or disclose any potential conflicts of interest resulting from ancillary business activities, the committee report said.

“The recommendations seem fairly balanced,” said Amit Tandon, Amit Tandon, Founder & Managing Director of corporate governance and proxy advisory firm IiAS. “In a way, this is recognising the role of proxy advisors and it is good to put a framework around their operations,” he added.

For proxy advisors, there should be disclosure if consulting services are provided, and codes that determine when not to provide a voting recommendation. The board of proxy advisors should be independent of its shareholders where such a position creates a serious conflict of interest, real or apparent, the report added.

SEBI had formed the committee to suggest and review the provisions pertaining to proxy advisors in SEBI (Research Analysts) Regulations, 2014. It had to review the functional areas including the rights and obligations of proxy advisors and relevant norms on proxy advisory industry including framework for dispute resolution between corporates and proxy advisors.

The regulator has sought public comments on the recommendations made in the group’s report till August 18.

Akin to US system

In the US, proxy advisors emerged as a result of expectations of the US market regulator to make investors exercise their voting rights. The establishment of Indian proxy advisors also approximately coincided with Indian regulatory requirements seeking disclosures by Indian mutual funds on their voting records and stance.

Published on July 29, 2019
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