SEBI takes steps to make Proxy Advisors more trustworthy

SEBI recognizes the role of proxy advisors in enabling shareholders to effectively participate in corporate governance decisions.

On August 3, 2020, SEBI issued a circular for procedural guidelines for proxy advisors. These guidelines will be effective from September 1, 2020.

Update: SEBI has extended the timeline for compliance of procedural guidelines and the same will be effective from January 1, 2020. 

Before we go into the details of the guidelines, lets first understand who are proxy advisors.

WHO ARE PROXY ADVISORS?

As defined under RA regulations, proxy advisor means any person who provides advice, through any means, to institutional investor or shareholder of a company, in relation to exercise of their rights in the company including recommendations on public offer or voting recommendation on agenda items.

In other words, proxy advisors are persons who evaluate the pros and cons of corporate actions on the agenda of general meetings of listed entities. Through their analysis, they help shareholders to make informed decisions and exercise their voting rights.

Do proxy advisors need to get registered with SEBI?

Yes, Proxy Advisors are required to get registered with SEBI under SEBI (Research Analyst) Regulations, 2014 (RA Regulations).

COMPLIANCE REQUIREMENTS FOR PROXY ADVISORS

Since proxy advisors have to get registered with SEBI under RA regulations, they have to comply with the requirements of the regulations similar to that for other research analysts.

They also have to abide by the Code of Conduct for Research Analysts as mentioned in Third Schedule of the regulations.

In addition to this RA regulations, SEBI has issued the procedural guidelines for conduct of proxy advisors.

The RA regulations and the procedural guidelines will help proxy advisors address the actual of potential conflict of interest while advising the shareholders.

So now, proxy advisors have to follow:

1. Compliance requirements under Chapter III of RA regulations
2. Additional disclosure requirements under Regulation 23 of RA regulations
3. Requirements under procedural guidelines issued by SEBI

COMPLIANCE REQUIREMENTS UNDER CHAPTER III OF RA REGULATIONS

All SEBI registered Research Analysts and Proxy Advisors have to follow the compliance requirements under Chapter III of RA regulations. Few of them are listed here:

1. Establish internal policies and procedures to address actual and potential conflict of interest
2. Monitoring personal trading activities of employees of proxy advisors
3. Disclosure in reports with regard to ownership and material conflict of interest, receipt of compensation, market making activity and public appearance, etc.
4. Abide by the Code of Conduct as mentioned in Third Schedule of RA regulations

ADDITIONAL DISCLOSURE REQUIREMENTS AS PER REGULATION 23:

The proxy adviser have to additionally disclose the following:

• the extent of research involved in a particular recommendation and
• the extent and / or effectiveness of its controls and procedures in ensuring the accuracy of issuer data;
• policies and procedures for interacting with issuers, informing issuers about the recommendation and review of recommendations;

DISCLOSURE REQUIREMENTS AS PER THE PROCEDURAL GUIDELINES:

The procedural guidelines are only applicable to proxy advisors. Proxy advisors have to disclosure:

1. legal requirement of their recommendation vis-a-vis higher standard they are suggesting if any, and the rationale behind the recommendation of higher standards.
2. conflict of interest on every specific document where they are giving their advice. Further, the disclosures should especially address possible areas of potential conflict and the safeguards that have been put in place to mitigate possible conflicts of interest.
3. any potential conflicts of interest resulting from other business activities including consulting services, if any, undertaken by them.

Additional requirements as mentioned in the procedural guidelines

Along with the disclosure requirements, proxy advisors also have to comply with the procedural aspects:

#1 – Voting recommendation policy –

Proxy Advisors have to formulate the voting recommendation policies and disclose the same to their clients. The policies should also disclose the circumstances under which they will not provide a voting recommendation. The policies have to be reviewed at least once a year.

#2 – Report on the recommendation –

1. The proxy advisors have to report the methodologies and processes followed in the development of their research and corresponding recommendations to its clients.
2. If there are any factual errors or material revisions to the report, the same has to be informed to the clients within 24 hours of receipt of such information.
3. The report has to be shared with the client and the company at the same time. The sharing policy should be disclosed by proxy advisors on their website.
4. Timeline to receive comments from company may be defined by proxy advisors. If there are any all comments / clarifications received from the company, within timeline, the same should be included as an addendum to the report.
5. If the company has a different viewpoint on the recommendations stated in the report of the proxy advisors, then proxy advisors, after taking into account the said viewpoint, may either revise the recommendation in the addendum report or issue an addendum to the report with its remarks, as considered appropriate.

#3 – Procedure to manage conflict of interest from other activities

Proxy Advisors have to establish clear procedures to disclose, manage and/or mitigate any potential conflicts of interest resulting from other business activities.

#4 – Maintenance of record of the voting recommendations

Proxy advisers have to maintain the record of the voting recommendations and furnish the same to SEBI on request.

Grievances with listed entities

Proxy Advisors carry out thorough research and analysis of the corporate actions. Proxy advisors may have different views on any agenda items of the listed entities and advice the shareholders accordingly. This leads to grievances between them and the listed entities.

To resolve the grievances, SEBI has now permitted listed entities to report such grievances to SEBI.

In case of grievance, SEBI will examine if there is non-compliance by proxy advisors with regards to the provisions of the Code of Conduct under the SEBI (Research Analyst) Regulations, 2014 and the procedural guidelines.

Hence proxy advisors have to follow the Code of Conduct and the procedural guidelines while dealing with shareholders of listed entities at all times. Any deviation from the guidelines will lead to non-compliance by proxy advisors.

Proxy advisors help in effective shareholder participation in key corporate governance decisions. These procedural guidelines will help in addressing the conflict of interest while dealing with the clients and make them more trustworthy.