The proxy advisory firms in India are regulated by Sebi, however, foreign proxy advisory firms are not regulated in India and in most other jurisdictions.
The recent case of what happened in the annual general meeting (AGM) of one of India’s most well-run companies HDFC was followed by a spurt in demand for foreign proxy advisory firms to be brought under SEBI regulation. The outrage against foreign proxy advisory firms followed after US-based global proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis suggested big institutional investors to vote against the re-election of Deepak Parekh, Bimal Jalan and Bansi Mehta to the board of HDFC in the company’s AGM on July 30, 2018, reported the Indian Express.
But what exactly are these foreign proxy advisory firms and how do they impact the decisions of the shareholders of a company?
Proxy firms/ institutional advisory firms:
Sebi defines proxy advisor as following: “Proxy adviser” means any person who provides advice, through any means, to institutional investor or shareholder of a company, in relation to exercise of their rights in the company including recommendations on public offer or voting recommendation on agenda items.
The primary duties of proxy advisory firms include researching and digging out information about a company, its directors, and promoters. They advise institutional investors to vote on resolutions put to vote by managements in AGMs. There are three domestic proxy firms in India: InGovern, Stakeholders Empowerment Services, and Institutional Investors Advisory Services (IiAS). US-based global proxy advisory firms ISS and Glass Lewis are active in India.
Regulation of proxy firms:
The proxy advisory firms in India are regulated by Sebi, however, foreign proxy advisory firms are not regulated in India and in most other jurisdictions. According to Sebi, the proxy adviser should disclose the extent of research involved in a particular recommendation, and the extent and/or effectiveness of its controls and procedures in ensuring the accuracy of the issuer data. “Proxy adviser is required to maintain the record of voting recommendations and furnish the same to the SEBI on request,” says Sebi.
HDFC AGM — what really happened?
About 97% of US’s proxy advisory industry is controlled by ISS and Glass Lewis. In the AGM of HDFC, the two foreign proxy advisory firms advised institutional investors against the re-election of former RBI Governor Bimal Jalan, chartered accountant Bansi Mehta, and Deepak Parekh, Chairman of HDFC. Jalan and Mehta, who came to know that the US advisory firms — along with a domestic firm — had advised investors to vote against them, opted out of the voting for re-election as Independent Directors on apprehensions that they would not be able to secure the required 75% of votes. However, Deepak Parekh scraped through with 77.3% votes and was re-elected as the non-executive Director.
Reason behind ISS and Glass Lewis “vote against” advice to investors:
According to ISS, Deepak Parekh and Bansi Mehta are currently Directors at eight and six public companies respectively in addition to their Directorship at HDFC. “Investors may be concerned whether Directors are able to fulfill their fiduciary responsibilities when they are serving on a large number of Boards, as in this case. While the demands of each Board will vary, and the capacity of each person will vary, holding the equivalent of more than six Directorships with publicly listed companies may make it challenging for a Director to devote adequate time to the affairs of each company,” the company said.
“In view of this, a vote AGAINST the election of Deepak Shantilal Parekh and Bansidhar Sunderlal (Bansi) Mehta is warranted,” ISS said. The suggestion was made to investors to vote against Jalan “given that he attended less than 75 per cent of Board and committee meetings during the latest fiscal year without satisfactory explanation”.
Criticism of foreign proxy advisory firms in India:
The presence of foreign proxy advisory firms in India has been highly criticised.
“We have seen the concentration of voting through global proxy advisory services, leading to concentration of voting power in the hands of a few global agencies. This questions the very basis of well-run, widely held companies and diversified ownership,” says Uday Kotak, Vice Chairman and MD of Kotak Mahindra.
“There should be a level playing field. Indian proxy advisory firms are regulated by Sebi. Why should not foreign firms be brought under regulation, too?”, questions J N Mehta, MD of Indian proxy firm SES.
Outlook towards these firms in the US:
There is a push for legislation to bring the citadel of proxy firms under regulation even in the US. The Corporate Governance Reform and Transparency Act of 2017 (HR 4015) was submitted to the US Senate for consideration after approval by the House of Representatives on December 21, 2017. The act would require proxy advisory firms to register with the US Securities and Exchange Commission, disclose potential conflicts of interest and codes of ethics, and publicise their methodologies for formulating proxy recommendations. The New York Stock Exchange and Nasdaq have been pushing for reforms at privately-owned proxy firms, reported the Indian Express. However, shareholder activist groups have been opposed to greater regulation and say these firms play an important role in the corporate governance ecosystem.