SEBI panel proposes code of conduct for proxy advisors

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.

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.