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SEBI prescribes stricter norms for proxy advisors

Finsec Law Advisors

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SEBI has recently issued two circulars in relation to proxy advisors. On August 03, 2020, SEBI issued a circular to lay down procedural guidelines to be followed by proxy advisors (“August 03 Circular”). Further, on August 04, 2020, a circular was issued to allow aggrieved listed companies to raise grievances against proxy advisors with SEBI (“August 04 Circular”). Both the circulars will come into effect from January 01, 2020.

At present, proxy advisors are regulated by SEBI under the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”). Realising the significant role played by proxy advisors in the capital markets, SEBI had set up a working group to study the scope of streamlining and strengthening regulatory standards prescribed for proxy advisors. The aforementioned circulars are based largely on the recommendations of the working group.

The key directions issued by SEBI under the August 03 Circular are highlighted below:

  1. Proxy advisors will be required to formulate voting recommendation policies and disclose the same to their clients. Further, they must disclose the methodologies and processes followed in the development of their research and corresponding recommendations to their clients.
  2. Proxy advisors shall share their reports with their clients and concerned companies, simultaneously. The said companies can share their comments and clarify issues raised in the reports of proxy advisors and the same shall be included as an addendum to the reports. Post consideration of the comments received from concerned companies, proxy advisors may revise their recommendations by way of addendum reports.
  3. Proxy advisors must mandatorily disclose concerns of conflict of interest in every document where they provide advice. Such disclosures should highlight potential areas of conflict and the measures that have been adopted to mitigate such risk.
  4. While assessing a company’s compliance with applicable laws, a proxy advisor must clearly disclose the applicable legal requirements vis-à-vis the higher standards prescribed by it for the entity. Further, where higher standards are recommended, the rationale behind the same should also be disclosed.

Further, under the August 04 Circular, listed companies have been granted the permission to approach SEBI to resolve their grievances against proxy advisors whose views/advice may differ from that of the companies. Given the nature of work of proxy advisors, SEBI has taken note that situations involving a difference of opinion between proxy advisors and listed companies are bound to arise. While addressing the concerns of listed companies, SEBI will examine whether proxy advisors have complied with the provisions of the Code of Conduct under Regulation 24(2) read with Regulation 23(1) of the RA Regulations and the procedural guidelines specified under August 04 Circular.