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This is an archive article published on July 30, 2019

SEBI panel proposes code of conduct for proxy advisors

The Sebi 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.

SEBI, SEBI guidelines, SEBI panel, SEBI code of conduct panel, SEBI proxy advisors, Indian express Sebi has sought public comments on the recommendations made in the group’s report till August 18. (File Photo)

A working group set up by the Securities and Exchange Board of India has proposed a code of conduct involving a ‘comply or explain’ approach for proxy advisory firms wherein listed companies aggrieved by the view of such entities can approach the watchdog for redressal.

“The proxy advisor should take appropriate steps to manage, mitigate and/ or disclose any potential conflicts of interest resulting from ancillary business activities. Creation of ‘Chinese Walls’ between proxy firms and their consultancy firms. There should be clear procedures to handle conflicts of interest,” the report said. Sebi has sought public comments on the recommendations made in the group’s report till August 18.

While noting that no further mandatory regulation is required, the group has recommended amendment to regulations that would allow listed companies, aggrieved by a view of a proxy advisor, to approach Sebi for redressal of their grievances. “Sebi may consider drafting a code of conduct for proxy advisors… on a ‘comply or explain’ basis,” the report said.

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Another suggestion is that disclosure of conflict of interest should appear on every specific document where the proxy advisory firms are giving their advice. “A generic disclosure/disclaimer on the proxy advisor’s website is inadequate and it should be extended to every place, including news quotes where a proxy advisor makes a statement. Disclosures should especially address possible areas of potential conflict and also the safeguards that have been put in place,” it said.

Besides, the group has suggested that institutional investors like foreign portfolio investors, portfolio managers, alternative investment funds, real estate investment trusts and infrastructure investment trusts could be mandated to ensure that proxy advisory firms employed by them have appropriate capacity and capability to issue proxy advice. The working group on issues related to proxy advisors was set up in November 2018. Proxy advisor is a person/ firm who provides advice to institutional investors or shareholder of a company to exercise their rights in the company including recommendations on public offer or voting recommendation on agenda items.

The Sebi 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.

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