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MUMBAI: Securities and Exchange Board of India (Sebi) on Monday issued disclosure standards for proxy advisory firms, policy for managing conflict of interest, and asked them to give companies a chance to respond.

This is the first time the regulator has issued disclosure standards for such firms. So far, proxy advisory firms were registered under and governed by research analyst norms of 2014 which prescribed a code of conduct.

Proxy advisory firms provide institutional investors with research, data, and recommendations on management and shareholder proposals that are voted on at a company's annual meeting or extra ordinary general meetings. They also comment on governance practices in companies which helps institutional investors take investment decisions.

Sebi's mandate is based on an expert panel report which had recommended managing conflict of interest and ensuring independence.

The regulator, in a circular, said proxy advisors will need to formulate voting recommendation policies and disclose it to their clients, and also disclose methodologies adopted for their research.

"It is not clear whether these guidelines originate from the recommendations by the panel set up by Sebi that reviewed regulations governing proxy advisory firms. In any event, many of these guidelines are currently being adopted by us in some form or other," said Shriram Subramanian, founder and MD, InGovern Research, a proxy advisory firm.

The firms, starting 1 September, would also be required to disclose conflict of interest on every specific document they issue advice.

"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," said Sebi.

JN Gupta, managing director and co-founder of stakeholder empowerment services (SES), a proxy advisory, said the circular in essence codifies the norms and standards which were already being followed.

Many proxy firms had faced resistance and criticism from companies that some of their recommendations go beyond what is required under the law and regulations.

To address this the market regulator directed proxy advisors to disclose in their recommendations the legal requirement vis-a-vis higher standard they are suggesting and the rationale behind the recommendation of higher standards.

"We believe Sebi is trying to standardise processes across proxy advisors registered with them. While these processes are already embedded in IiAS’ work flow, we will continue to work with Sebi to ensure that Indian markets continue to attract quality long term capital," said Amit Tandon, chief executive, Institutional Investor Advisory Services (IIAS), a proxy advisory firm.

While many of these directions in the circular are standards already being followed by Indian firms, the clause of giving the report to company and seeking their comments may find some opposition.

As per the circular, firms need to share their report with clients and the company at the same time.

"Timeline to receive comments from company may be defined by proxy advisors and all comments/clarifications received from the company, within timeline, shall be included as an addendum to the report. 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," said Sebi.

For instance, InGovern as a practice does not share the report with the company unless they pay for it and neither do they seek comments from the company.

IIAS, however, shares its report with the company and asks for comments before providing their clients the details and also shares the final report with both.


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