Proxy adviser
Also written Proxy advisor · Proxy advisory firm · Proxy advisers
A person who advises institutional investors or shareholders on exercising their rights in a company, including voting recommendations on agenda items and recommendations on public offers.
In plain language
A large institution may hold several hundred Indian companies. Every one of them puts resolutions to a vote, most of them in the same few weeks of the year, and the fund manager has a fiduciary duty to vote in the beneficiaries' interest on each. Reading every notice is not realistic.
Proxy advisers are the independent research outfits that do that reading. They analyse the matters put to shareholders — mergers, acquisitions, senior appointments, executive pay, related-party transactions — and publish reports recommending how to vote.
Regulation 2(p) of the SEBI (Research Analyst) Regulations, 2014 defines a proxy adviser as any person who provides advice, through any means, to institutional investors or shareholders of a company in relation to the exercise of their rights in the company, including recommendations on a public offer or a voting recommendation on agenda items. That is the regulatory home: there is no separate set of proxy adviser regulations.
How it works
Registration and conduct. Proxy advisers register with SEBI under the Research Analyst Regulations, and Chapters II to VI apply to them mutatis mutandis — registration, management of conflicts of interest and disclosure, inspection, procedure for action in default, and miscellaneous. They must abide by the code of conduct in the Third Schedule, maintain a record of their voting recommendations and furnish it to SEBI on request, and their employees engaged in proxy advisory services must be at least graduates in any discipline.
Procedural guidelines. SEBI's circulars add the operating rules that get examined:
- voting recommendation policies must be formulated, disclosed to clients, reviewed at least once annually, and must state the circumstances in which no recommendation will be given;
- methodologies and processes behind the research must be disclosed to clients;
- clients must be alerted within 24 hours of receipt of information about any factual error or material revision, and material revisions communicated within 72 hours, leaving clients adequate time to decide;
- reports must be shared with clients and the company at the same time, under a sharing policy disclosed on the adviser's website; comments received from the company within the adviser's stated timeline go in as an addendum, and the adviser may either revise the recommendation in the addendum or issue the addendum with its own remarks;
- where the adviser recommends a standard higher than the legal requirement, it must say so and give the rationale;
- conflicts of interest must be disclosed on every specific document carrying advice, addressing the potential conflict areas and the safeguards in place.
The three structural conflicts SEBI names are shareholding in the proxy adviser by a listed company or a group with listed companies; consulting assignments for companies that may later be scrutinised; and any other revenue source or relationship, such as interlocking board positions, that poses a real or apparent conflict.
A worked example
Helios Cements Ltd puts a related-party transaction worth Rs 310 crore to shareholders at an EGM. Three institutions holding 18.4% between them subscribe to a SEBI-registered proxy adviser.
- Day 1. The adviser publishes a report recommending a vote against, and shares it with Helios and with its clients at the same time. Its disclosed policy gives the company a five-day comment window.
- Day 3. Helios writes in with a different view of the valuation. The comments are included as an addendum; the adviser keeps its recommendation and issues the addendum with its remarks.
- Day 4. An analyst spots that a subsidiary's turnover was misstated in the report. Clients must be alerted within 24 hours of the adviser receiving that information, and the material revision communicated within 72 hours.
- Day 6. The report discloses that its recommendation applies a higher standard than the law requires — the transaction is permissible with majority-of-minority approval, but the adviser wants an independent valuation as well — and explains why.
Helios believes it was treated unfairly. Its remedy is not a suit against the adviser. A listed entity may approach SEBI, which examines non-compliance with the code of conduct under Regulation 24(2) read with Regulation 23(1) of the Research Analyst Regulations and with the procedural guidelines.
Why NISM asks about it
Chapter 23 (Proxy Advisors) — the definition, the procedural guidelines, and the grievance route for listed entities. The chapter's own review question is the definition itself. Beyond that, the 24-hour alert and 72-hour revision pair and the "shared with clients and the company at the same time" rule are the most commonly tested details, along with the four proxy advisers registered with SEBI: IiAS, SES, Institutional Shareholder Services India and Ingovern Research Services.
Common exam traps
- Proxy advisers are regulated under the SEBI (Research Analyst) Regulations, 2014, not under separate proxy adviser regulations. Chapters II to VI apply mutatis mutandis.
- 24 hours to alert, 72 hours to communicate the revision. The two numbers attach to different acts and are routinely swapped in the options.
- Reports go to clients and to the company at the same time — not to the company first for approval, and not to clients first.
- The adviser is not obliged to change its recommendation because the company disagrees. It may revise in the addendum, or issue the addendum with its remarks and stand by the original view.
- The voting recommendation policy must be reviewed at least once annually and must disclose when no recommendation will be given.
- A listed entity's grievance goes to SEBI, which tests it against the code of conduct and the procedural guidelines. Employees providing proxy advisory services need a graduate qualification in any discipline, plus certification as SEBI specifies.
Check yourself
1.Where may a listed entity take a grievance against a SEBI-registered proxy adviser?
- a)To SEBI
- b)To SAT
- c)To the Registrar of Companies
- d)To the RBI
Show the answer
Answer: (a) To SEBI
In order to facilitate resolution of such grievances of listed entities against SEBI registered proxy advisors, the listed entities may approach SEBI.
And what SEBI will do: SEBI will examine the matter for non-compliance by proxy advisors with the provisions of the Code of Conduct under regulation 24 (2) read with regulation 23(1) of the SEBI (Research Analyst) Regulations, 2014 and the procedural guidelines for proxy advisors issued by SEBI.
Note that the examination is of compliance, not of the opinion. Disagreement is expected — due to the inherent nature of the work, it is probable that proxy advisors and listed entities may have different views on any agenda item of the listed entity leading to grievances.
So a company cannot complain that a recommendation went against it. It can complain that the report was not shared with their clients and the company at the same time; that its comments received within the defined timeline were not included as an addendum to the report; that a factual error was not alerted within 24 hours; that conflicts were not disclosed on every specific document; or that a higher standard was urged without disclosing the legal requirement vis-a-vis the higher standard and its rationale.
The background obligation lies on the company itself. Regulation 4(2)(a) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires listed entities to protect the right to participate in, and to be sufficiently informed of, decisions concerning fundamental corporate changes, the opportunity to participate effectively and vote in general shareholder meetings, effective shareholder participation in key corporate governance decisions, and exercise of ownership rights by all shareholders, including institutional investors.
**And proxy advisers have played a key role in enabling shareholders to effectively participate in corporate governance decisions.
2.Within what periods must a proxy adviser alert clients to factual errors and communicate material revisions?
- a)Alert within 24 hours of receipt of the information; communicate material revisions within 72 hours, ensuring adequate time remains for clients to make an informed decision
- b)Alert within 72 hours; communicate within 24 hours
- c)Both within 7 days
- d)Both before the next report is published
Show the answer
Answer: (a) Alert within 24 hours of receipt of the information; communicate material revisions within 72 hours, ensuring adequate time remains for clients to make an informed decision
Proxy Advisors shall alert clients within 24 hours of receipt of information, about any factual errors or material revisions to the report. Further, any such material revisions to their reports shall be communicated to the clients within 72 hours of receipt of the information, while ensuring that adequate time is available for clients to make an informed decision.
Twenty-four hours to alert, seventy-two to communicate — option B reverses them.
**Both clocks run of receipt of information, not from publication of the original report.
And the closing words are the real test: while ensuring that adequate time is available for clients to make an informed decision. A revision that technically lands inside 72 hours but arrives after the meeting has voted has failed.
Because the whole product is time-sensitive. Proxy advisers exist partly because meetings happen based on the calendar set by corporate law and investors face a time crunch to read and analyse a lot of data.
How errors are likely to surface is through the sharing mechanism: reports go to their clients and the company at the same time, the company may comment within the adviser's timeline, and all comments/clarifications received from the company, within the timeline, shall be included as an addendum to the report.
Prevention is addressed by disclosure. The adviser must 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 issuer data.
**And there must be a stated process to communicate with its clients and the company.
3.When must a proxy adviser share its report with the company that is the subject of it?
- a)At the same time as it shares the report with its clients
- b)After the shareholders have voted
- c)Only if the company requests a copy
- d)A week before sharing it with clients
Show the answer
Answer: (a) At the same time as it shares the report with its clients
Proxy Advisors shall share their reports with their clients and the company at the same time. This sharing policy should be disclosed by proxy advisors on their websites.
Simultaneously — which disposes of options B, C and D.
What follows is a right of reply. Timeline to receive comments from the company may be defined by proxy advisors and all comments/clarifications received from the company, within the timeline, shall be included as an addendum to the report.
The adviser sets the window; the comments must then be carried.
And the adviser must engage with them: 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.
Note "may either... or" — the adviser is never compelled to change its recommendation, only to consider the company's view and then either revise or record its remarks.
A companion guideline requires the machinery to exist in advance: Proxy Advisors shall have a stated process to communicate with its clients and the company.
**And the adviser must disclose policies and procedures for interacting with issuers, informing issuers about the recommendation and review of recommendations.
Why this matters. Before simultaneous sharing, a company often learned of an adverse recommendation from its own shareholders, with no opportunity to correct a factual error before the vote — which is also why errors must be alerted within 24 hours and revisions communicated within 72 hours.
Where this is taught
Free preparation for NISM Series III-ARelated terms
- Chinese WallAn enforced separation inside a firm between departments holding confidential price-sensitive information and those dealing with clients, sales or public research.
- Conflict of interestAny interest of the analyst's own — a shareholding, a fee, a relationship — that could bias the research, and which the regulations require to be disclosed rather than merely avoided.
- Corporate governanceThe rules, processes and procedures followed in the management and operations of a firm, so that the company is run to take care of all stakeholders — shareholders, lenders, employees, suppliers and customers.
- Research AnalystUnder the SEBI Research Analysts Regulations, 2014, a person who, for consideration, is engaged in the business of providing research services — including a part-time research analyst.