Proxy Advisors And Its Regulations

Introduction

When the companies were “originally founded, the only conceivable means to get a unanimous decision was by voting, which required the actual attendance of all members. Because shareholders acquire shares on the stock market and have no personal access to the company, it is not possible to have every member present at every meeting. Furthermore, because of the global market, even foreigners invest in companies, making it impractical for everyone to vote in person, and it is a time-consuming and costly process for businesses to follow. These factors led to the development of the ‘proxy’ idea, in which one person is nominated to represent another, and the proxy has the authority to vote on behalf of the shareholder provided the shareholder has permitted the proxy to do so, and this has proven to be a more convenient method of voting.”^[1]

This voting method evolved in “response to societal requirements, and proxy advisory firms emerged as third-party consultants that offered professional counsel and recommendations on whether to vote “for” or “against” the motion taken in the company. Essentially, these companies are the result of shareholder activism that has exploded as a result of the companies’ shady corporate governance. Their primary goal is to provide advice to shareholders, but they can also be given the authority to vote if the owners specifically permit it.

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This technique has been “in use in the financial markets of the United States since the 1980s, but the proxy advice sector was almost non-existent in India until the 2000s. When the Satyam fraud occurred in 2009, the whole financial market trembled. The Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2010 was passed by SEBI in July 2010 as one of the measures to avert similar incidents. This regulation required increased openness in voting and disclosure of the procedures used to establish a shareholder’s voting rights. This rule by SEBI, along with an increase in shareholder activism and indulgence, resulted in the emergence of the proxy advice industry in India. Mr. Shriram Subramanian founded the first proxy advice business in India, ‘InGovern Research Services,’ in June 2010.”^[2] Since then, other companies have emerged, including Institutional Investors Advisory Services (IIAS), Stakeholders Empowerment Services (SES), and others, all of which have seen tremendous development.

Indian Framework

Under the SEBI Regulations, proxy advisory companies operating in India must get a licence. They must also comply with the SEBI Regulations, which require them to establish a code of conduct. The SEBI Regulations include requirements for registration, eligibility criteria, conflict of interest management, and the development of a code of conduct, among other things.”[3]

• Conflict of Interest

Regulation 15 (1) of the “SEBI Regulations requires organisations to establish internal policies and procedures controlling the dealing and trading of securities of the subject business by any research analyst in order to manage real or prospective conflicts of interest resulting from such deals or trading. Employees of consulting firms are also subject to limitations under the aforementioned Regulations. Regulation 17 establishes the requirements for research analyst remuneration, which must be evaluated by the research entity’s board of directors and be separate from the brokerage services division. Furthermore, the SEBI Regulations stipulate that reports of a subject firm in which the research analyst has served as a management or co-manager are not to be published or distributed.”[4]

• Material Misstatements and factual errors

In line with Regulation 23 of the SEBI Regulations, proxy advisers must also include in their reports the degree of research involved in a specific recommendation, as well as the extent and/or efficacy of their controls and processes in assuring the correctness of issuer data. Furthermore, according to the above-mentioned SEBI procedural standards, proxy advisers must guarantee that recommendation policies are reviewed at least once a year. They must also disclose to their customers the methodology and procedures used in the production of their research and suggestions.[5]

• Interaction with subject company

A proxy adviser “must disclose the rules and methods for dealing with issuers, alerting issuers about recommendations, and reviewing recommendations, according to Regulation 23 of the SEBI Regulations. According to the aforementioned SEBI procedural requirements for proxy advisors, the proxy adviser must have a documented communication mechanism with its customers and the company. Furthermore, proxy advisers must simultaneously communicate their report with their clients and the corporation. Proxy advisers are required to publish their ‘sharing policy’ on their website.”[6]

• Difference of opinion

The opinions expressed “by proxy advisers are exclusively based on their research and interpretation and are not subject to regulatory clearance. Furthermore, because the businesses’ criteria are founded on the highest corporate governance principles, they may go above what is required by law.”According to “SEBI’s procedural norms, they must explicitly identify in their recommendations the legal necessity for the higher standard they are proposing, if any, as well as the rationale for the suggestion of higher requirements.

Conclusion

The Indian “stock market is rising by the day, and investors are becoming more involved in the complexities of the topic than they were previously. This has undoubtedly created a favourable environment for the establishment of the proxy sector in India. Proxy advice companies have transformed the notion of corporate governance since they play such an important part in how a business operates. Annual meetings are no longer dominated by a few individuals; instead, the company’s directors must tune themselves and act in accordance with proxy advisers’ recommendations, since they are the institutional investors’ guides.” The businesses establish a system of transparency, checks, and balances for the company’s investors by notifying them of minute developments in the company that could otherwise go unnoticed. “This may aid in a better understanding of the situation and, as a result, in the formulation of shareholder choices. Without a sure, the proxy industry plays a smaller role in India than it does in the United States since India is a hotbed of family-owned enterprises with minority shareholders, making authority difficult to dispute. However, the function of proxy advisers is anticipated to evolve over the next decade as a result of a rise in start-ups with diversified shareholdings.” Firms will gain from this, and proxy advisors will play a key role in addressing investor concerns by interacting constructively with companies.

Author: Rishab Pillai Student at Dharmashastra National Law University, Jabalpur, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

[1] Role of Proxy Advisory Firms in Corporate Governance, Legal services India, http://www.legalservicesindia.com/article/2303/Role-of-Proxy-Advisory-Firms-In-Corporate-Governance.html

[2] Proxy Advisers: What is the proper role? Financial Management, November 19, 2019, https://www.fm-magazine.com/news/2019/nov/role-of-proxy-advisers-201922438.html

[3] The proxy adviser regime in India: Ingraining principles of natural justice in corporate governance, International Bar Association, https://www.ibanet.org/article/288eaa21-69da-4807-afb7-6e43071761fa

[4] See www.sebi.gov.in/sebi_data/commondocs/RESEARCHANALYSTS-regulations_p.pdf

[5] Ibid.

[6] Sebi issues disclosure standards for proxy advisory firms, Livemint, https://www.livemint.com/news/india/sebi-issues-disclosure-standards-for-proxy-advisory-firms-11596457774523.html