The Securities and Exchange Board of India notified on 3rd Aug 2020 that it shall be compulsory for the proxy advisors to share their report with its clients and the company at the same time. This is the first time the regulator has come out with guidelines for local proxy advisors after framing regulations in 2014. This notification shall be effective from September 1.
The time period to obtain remarks from the company may be well-defined by such advisors and all such acknowledged comments from the company should be recorded as an addition to the report. Such policy shall be revealed by proxy advisors on the company’s website.
In cases where the company has a different viewpoint on the references stated in the reports prepared by the proxy advisors, it may either review the recommendation in addendum report or grant an addition to the report with its remarks marked as appropriate.
The proxy advisors must aware of their clients within 24 hours of reception of data provided on any factual errors or material revisions for the report. Such advisories shall also reveal the circumstances in which they shall be unable to provide appropriate advisories.
The proxy advisors should also divulge details regarding the procedures and methods applied for progressions of their exploration and corresponding approvals to their clients.
The proxy advisors shall also be responsible to apply higher standards in their advisories the reasonable basis behind such recommendations. It shall also include necessary disclosures of conflict in interests for every specific document while providing their services to clients.
Who are Proxy Advisory Firms?
A proxy advisory firm is basically an entity that serves advisory to institutional investors like mutual funds, insurers, etc. about the ways to act on numerous companies’ activities that could impact shareholders’ decisions.
Proxy advisory / Advisory firms are those independent research getups that possess deep knowledge of the industry and consequently analyze the advantages and disadvantages of the important corporate matters such as mergers, acquisitions, important appointments in the board panel and managerial remunerations, etc. the matters on which shareholders are expected to vote on in AGMs, EGMs or other meetings prescribed as per the provisions of Companies Act 2013.
These entities/firms perform deep analysis of the chief activities/functions that are put to vote and produce detailed reports recommending shareholders on decisions they should make and how these should be made, and the ways through which they can safeguard their interests. In a turn of which they charge a certain amount as fees from their clients (institutional investors) and do offer independent voting recommendations on the companies, their clients have attached interests on a regular basis.
Presently, India has some of the home-based proxy advisory entities namely Institutional Investor Advisory Services (IiAS), InGovern, and Stakeholder Empowerment Services (SES) who offer these services to the clients.
What are the functionalities performed by them?
The private advisory firms may not have any role to perform in the ideal world, as there would be companies and shareholders and the management board to take the management decisions under the authority of shareholders and by making the board liable for their improper actions.
Shareholders, in turn, would appear in all the AGMs and EGMs consistently and vote only out of their own consciences, for ensuring long-term benefit of their companies. They would read all notices and resolutions prudently and participate wisely all times. But the reality is quite different from the ideals. Usually, shareholders are less concerned about company board decisions and just care about a good rate of dividends, bonuses, free coupons, and gifts at the AGMs.
Thus, entities like institutional investors such as mutual funds and insurers do embody retail investors as proxies in meetings. Still, these institutional investors also managing multiple stocks once, they sometimes also fail to keep a close eye every corporate happening.
How they may prove useful for the investors?
Generally, every retail investor doesn’t prefer to attend all the AGMs and EGMs of the companies on his own. But if the investor is conscientious in nature, he/she may opt for e-voting in the events related to big corporate events. Thus, the proxy advisory firms can turn out to be a true guide for the investor, who may miss some big corporate action due to negligence.
Additionally, the advisories sometimes fulfill their duty of policing the committees, panels, and government accounts of the firms, and making institutional investors conscious to take a stand in case of trust or governance issues.
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