Sebi's expert committee supports regulating global proxy companies

An expert group set up by the Securities and Exchange Board of India (Sebi) to formalise a framework for regulating proxy and corporate governance firms has set its eyes on global proxy firms. 

Global proxy firms came to limelight following their controversial recommendations on the removal of HDFC Chairman Deepak Parekh.

According to sources, the panel is in favour of Sebi regulating global proxy firms advising on domestic companies

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The panel, headed by founder of Finsec Law Advisors Sandeep Parekh, had its first meeting last week, when key issues were discussed.

The committee also discussed measures for protecting proxy advisor firms from corporate litigation.

Proxy advisory and corporate governance firms have gained prominence in the stock market ecosystem because large institutional investors follow voting recommendations they offer.

Currently, there are no specified provisions for proxy advisory firms. Domestic firms have to register with Sebi under the research analyst regulation. 

“The panel raised the role of global proxy firms in influencing voting decision without being regulated by the Indian regulator,” said a person privy to the development. The discussion was also around litigation two domestic advisory firms are facing due to their voting recommendations.

According to him, the panel is working on the rights and obligations of these firms and will submit its interim report on the new framework in less than three months.

Besides, the panel contemplated whether the global advisory firm should be registered with Sebi.

On occasions minority investors have voted against corporate resolutions when proxy firms have raised the red flag.

Recently, some foreign institutional investors had voted against a resolution on the reappointment of Parekh on the board of HDFC. While a majority voted in favour of Parekh’s appointment, the resolution got around 23 per cent votes against the resolution.

Global proxy firms’ recommendation on Parekh, a banking sector veteran, came under criticism as it was seen as without much basis. The episode also triggered fears that global proxy firms, without being regulated, can influence critical corporate decisions at India Inc.

“If proxy firms are going to issue advisories on Indian companies, they need to be held accountable,” said a panel member.

The committee deliberated on measures to help proxy firms deal with legal hurdles created by corporate India. 

Last year, ITC had filed a defamation suit proxy firm Institutional Investor Advisory Services (IiAS) over its recommendation on the appointment and remuneration of Non-Executive Chairman Y C Deveshwar.

Sources say the expert panel has been apprised of the cases in court. In the ITC case particularly, the panel is of the view that the regulator has the powers to suo motu enquire about it from the company concerned. However, since the matter is in court, the regulator has no say in it, said another person.

After the Satyam Computer case, Sebi was instrumental in bringing these proxy firms into existence by making it mandatory for institutions such as mutual funds to vote on resolutions of investee companies. Sebi had then observed that most of the large institutions hardly voted on resolutions.

Subsequent reform such as the framework on related party transactions has made the role of proxy advisory firms even more critical. Several large institutions subscribe to reports of these firms.

At present, there are three domestic advisory firms — Ingovern Research Services, IiAS, and Stakeholders Empowerment Services — and one global-US proxy firm, Institutional Shareholder Services (ISS), are registered with Sebi.