India’s Securities and Exchange Board’s (SEBI) recent suggestion of a new code of conduct for proxy advisory firms has caught the attention of the financial world. The proposal introduces a ‘comply or explain’ approach to the dealings of listed companies with proxy advisors, providing a platform for redressal under SEBI’s supervision for any company aggrieved by a proxy advisor’s viewpoint. This article delves into what the comply or explain approach entails, the role of a proxy advisor, the possible conflicts of interest at play, and the implications for institutional investors.
Understanding the ‘Comply or Explain’ Approach
The ‘comply or explain’ tactic is a regulatory technique employed in business environments. Listed companies are given two options: compliance with specific actions or, if non-compliant, they must publicly clarify the reasons behind their refusal to comply. This approach, proposed by SEBI for adoption by proxy advisory firms, offers a transparent manner for companies to either adhere to the views of proxy advisors or offer an explanation if they choose otherwise.
Role of Proxy Advisors
In the world of finance, a proxy advisor is either a person or a firm that lends advice to institutional investors or shareholders of a company on how to exercise their rights within the said company. These rights include, but are not limited to, recommendations on public offers or voting recommendations on agenda items.
Potential Conflicts of Interest and Disclosure
An important part of SEBI’s proposal includes the necessity for proxy advisors to disclose potential conflicts of interest. The board of proxy advisors is required to be independent of its shareholders due to the serious conflict of interest that might arise otherwise. This requirement stems from the fact that proxy advisors often engage in ancillary business activities which could potentially create conflicting interests, thereby affecting the credibility of their advice.
| Conflicts of Interest | Potential Impact |
|---|---|
| Engagement in ancillary business activities | Affects the credibility of advice |
| Shareholders’ influence on the board of advisors | Possible bias in advice |
Implications for Institutional Investors
Institutional investors come in many forms, from foreign portfolio investors, portfolio managers, to alternative investment funds, infrastructure investment trusts, among others. SEBI’s recent proposal underscores the need for these institutional investors to ensure that their employed proxy advisory firms possess the necessary capacity and capability to issue appropriate proxy advice. This specification is a crucial step in ensuring that the transaction of advice between these firms and investors is reliable, transparent, and beneficial for the company involved.
This article draws on information sourced from IE.
