SEBI-Appointed Working Group Proposes Changes In Norms Governing Proxy Advisers

A panel constituted by the market regulator suggested more disclosures, transparency, code of conduct, among other regulations that govern the activities of proxy advisory firms in India.

The working group, chaired by Sandeep Parekh, has submitted its report to the Securities and Exchange Board of India. In its report, the panel said that the impact of proxy advisory firms has been “mostly positive” and has helped in increasing shareholder activism and the negatives can be resolved through market actions. The regulator has invited public comments on the report by Aug. 18.

Here are the key recommendations made by the working group:

Avoidance Of Conflict Of Interest Through Chinese Wall Structure

The first recommendation made by the working group is for an establishment of a “Chinese wall structure” for avoiding conflict of interest. The recommendation states that there must be a clear separation between:

• business providing proxy voting service to shareholders;
• business providing advisory, governance and management services to listed companies.

Disclaimers: The working group said that standalone or generic disclaimers on websites of proxy advisers are inadequate. In order to address the potential conflict of interest, a proxy firm must put a disclaimer or disclosure in every news quote or statement.

Besides, proxy advisory firms must have a publicly available “conflict of interest policy” and should limit itself to providing voting services only.

Need For A Stewardship Code

Citing international practices, the working group recommended that the SEBI should introduce a stewardship code for institutional investors. A stewardship code requires institutional investors to be transparent about their investment processes.

“In the future, SEBI should make a stewardship code (like the U.K. Stewardship Code) mandatory for all institutional shareholders, and such code should be publicly available,” the report said. “Stewardship code is recommended as a welcome addition, even if based on a comply or explain basis for certain large investors.”

Another recommendation by the group stated that proxy advisory firms may introduce a voluntary best practices code which would govern them. This can be based on the principle of “comply or explain”.

Code Of Conduct For Indian And Foreign Proxy Advisers

The working group has recommended that the board must frame a code of conduct under its existing regulations to govern domestic and foreign proxy advisers. Such code of conduct must be based on the “principles of fairness” and should function on a “comply or explain basis”. No separate regulation for foreign proxy advisers was recommended as the group has noted that such regulation would be unfair.

Veteran banker Uday Kotak had sought regulation of foreign proxy advisers in India after two U.S.-based proxy advisers had asked investors to vote against the reappointment of Deepak Parekh on the board of Housing Development Finance Corporation Ltd. in August 2018.

Code of conduct is an integral part of SEBI’s regulations governing research analysts. The panel has recommended that any dispute between a corporate entity and a proxy adviser must be examined by SEBI to observe the compliance of code by proxy advisers.

Board’s Independence

To avoid a potential conflict of interest, the group recommended that the board of a proxy advisory firm must be independent of its shareholders.

Similarly, a potential conflict of interest may arise when a proxy advisory firm has to provide a view on a company which holds substantial shareholding in it. Such a view may suffer because of conflict of interest. In such cases, the group recommended that a proxy advisory firm must be allowed to provide a view with full disclosures.

Disclosures

The working group has noted that the requirement for disclosure of the material information from which a proxy firm derives its recommendation would prove burdensome for proxy firms.

Proxy firms must provide the following yearly disclosures on their website:

• Shareholding pattern and changes therein
• Financials and changes in the board of directors.
• Details of litigation.

Other Recommendations By The Group

• Requirement of net worth for proxy advisers should be removed.
• Proxy advisers must not be overburdened with certification and education norms for their staff.
• Promoting use of advanced technologies for increasing shareholder participation in general meetings.