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  • Shashank Shekhar, Namisha Ojha

Proxy Advisory Firms: Shaping Corporate Governance Practices in India

[Shashank and Namisha are students at Hidayatullah National Law University.]


The Indian corporate landscape is experiencing a significant transformation, driven by the growing influence of proxy advisory firms (PAF(s)). These entities, acting as advisors to institutional investors and shareholders, provide recommendations on how to exercise voting rights, influencing crucial decisions in corporate governance. This rise has sparked an intense debate, with both praise for their potential to improve transparency and accountability, and concerns about their impact on corporate autonomy.


Understanding the role of PAFs requires a nuanced analysis. The evolving regulatory landscape, marked by legal frameworks such as the SEBI (Research Analysts) Regulations 2014 (SEBI Regulations), SEBI (Investment Advisers) Regulations 2013 and Procedural Guidelines for Proxy Advisors (Procedural Guidelines), has encouraged greater disclosure, shareholder participation, and investor activism, creating fertile ground for the emergence and influence of these firms. Proxy advisors as defined under Regulation 2(p) of the SEBI Regulations, 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”.


Growing investor activism also plays a crucial role. Institutional investors, increasingly demanding good corporate governance, rely heavily on PAFs for informed decision-making, amplifying their impact on shareholder votes. In short, institutional investors outsource shareholder activism to the PAFs. The rise of the information age empowers investors to engage with companies and hold them accountable, thanks to easy access to information and digital platforms. PAFs leverage this, providing comprehensive research and analysis that enables informed decisions. Their effectiveness in influencing shareholder voting and corporate behavior is evident, leading to positive reforms and improved governance practices.


This article deals with the multifaceted role of PAFs in India, focusing on their influence on shareholder voting, transparency, and accountability. Understanding the methodologies and practices employed by these firms is crucial to demystifying their decision-making processes and their impact on corporate governance. The article then delves into concerns regarding potential conflicts of interest and power dynamics within PAFs. Finally, it presents an analysis of the drawbacks associated with their existence, offering a glimpse into their future prospects within the Indian market.


PAFs' Impact on Corporate Governance


PAFs have emerged as influential actors in India’s corporate landscape, impacting shareholder voting patterns, corporate behavior, and governance practices. While their potential to promote positive change is undeniable, their impact remains a subject of ongoing debate, with concerns regarding their potential for bias and excessive power.


PAFs influence shareholder voting by providing institutional investors with research and recommendations on how to vote on resolutions. This influence has been significant, with studies suggesting that PAF recommendations are followed by institutional investors in a majority of cases. This can lead to greater accountability, as companies face pressure to address governance concerns and align executive compensation with performance. One such instance is when PAFs like Institutional Investor Advisory Services (IiAS) and Institutional Shareholder Services advised the shareholders to vote against Anant Ambani’s appointment to the board of Reliance Industries citing governance matter and stating that his appointment as a non-executive, non-independent director does not align with their voting guidelines.


Furthermore, PAFs promote transparency and accountability by exposing governance shortcomings and raising awareness of potential conflicts of interest and also by providing an independent assessment of a company's governance and recommendations to institutional shareholders on matters such as executive compensation, board elections, and other governance matters that require shareholder approval. In another instance, IiAS and Stakeholders Empowerment Services (SES) urged shareholders to vote against the resolutions of One97, the parent company of Paytm, on reappointment of Vijay Shekhar Sharma as MD. SES cited “dual position of CMD and excessive remuneration” as the primary reasons for their opposition.


However, concerns exist regarding the potential for bias in PAF recommendations. Critics argue that PAFs may favor specific investor interests or adopt a “one size fits all” approach, ignoring company-specific contexts. This raises the possibility of recommendations that are not in the best interests of all shareholders or the long-term benefits of the company. It is also argued that suggestions put forth by PAFs mirror investor sentiment, as their proxy policy formulation process incorporates input from an annual survey of institutional investors.


Moreover, the concentration of power in the hands of a few PAFs raises concerns about potential conflicts of interest. As PAFs advise a large number of institutional investors, their recommendations can significantly influence market sentiment and stock prices, creating opportunities for abuse. As per Chairman Rep. Scott Garrett of Capital Markets and Government Sponsored Enterprises Subcommittee, “Proxy advisory firms have increasingly teamed up with unions and others to push proposals that are generally immaterial to investors and often reduce shareholder value.” He also added that “proxy advisory firms have increased the costs of doing business for many public companies and disincentivized private companies from going public, all without a corresponding benefit to investor returns.”


Despite these concerns, PAFs have demonstrably driven positive reforms in corporate governance. Their recommendations have contributed to mandatory independent director positions, strengthened whistleblower protection, and improved shareholder engagement mechanisms.


Indian Proxy Voting Industry and their Methodology and Practices


In the dynamic landscape of Indian corporate governance, PAFs like IiAS, SES, and InGovern wield significant influence. These entities guide shareholder voting, fostering transparency and accountability through meticulous research, analysis, and recommendations. Delving into their methodologies and practices reveals the inner workings of this influential industry, shaping the future of India's corporate landscape.


  1. IiAS – Institutional Investor Advisory Services Limited was started in 2011 by Anil Singhvi and Amit Tandon. It is dedicated to delivering unbiased perspectives, research, and data on corporate governance and ESG issues, along with providing voting recommendations on shareholder resolutions for around 800 companies, which collectively constitute over 95% of market capitalization in the Indian market.

  2. SES - Stakeholders' Empowerment Services was started in 2012 by Jitendra Nath Gupta, Arjun Gupta and Amaredra Singh. It is dedicated to promoting the active engagement of stakeholders in corporate governance, an essential foundation for the long-term sustainable growth of the company. Through collaboration with investors, the organization assists in analyzing governance practices at listed companies, provides education on corporate governance-related matters, and empowers stakeholders with governance tools to facilitate meaningful participation in the Corporate Governance process.

  3. InGovern – InGovern Research Services was started in India in 2010 by Mr. Shriram Subramanian (formerly with Infosys Consulting). It is dedicated to providing vote recommendations which covers shareholder meetings, including AGM, EGM, postal ballots and court convened meetings. Further, it also provides shareholder activism and value enhancement services to investors and corporates.


Challenges and Opportunities


The landscape of PAFs is fraught with challenges shaping the contours of their role in corporate governance. Chief among the concerns is the spectre of conflicts of interest and power dynamics that loom over these entities. It is argued that PAFs often find themselves straddling the delicate line between being advisors to investors and providing consultancy services to the very companies investors seek guidance on. This duality introduces the risk of biased opinions seeping into their recommendations, potentially compromising shareholder interests.


To address these concerns, regulatory frameworks such as Regulation 23 of the SEBI Regulations are in place, mandating the disclosure of conflict of interest and the formulation of internal policies to manage and mitigate such conflicts. Nevertheless, the challenge persists, necessitating continuous vigilance to ensure the independence and integrity of PAF analyses.


A critical facet of the challenge spectrum lies in the interaction between PAFs and the subject companies. Regulation 24(2) read with 23(1) of the SEBI Regulations, along with Procedural Guidelines, outlines the need for transparent communication between proxy advisors, clients, and the companies they assess. This involves timely sharing of reports, defining comment timelines, and acknowledging dissenting viewpoints from the subject companies. Striking a balance between engaging with companies for clarity and maintaining independence in recommendations remains a delicate manoeuvre for PAFs.


The international landscape mirrors these concerns, as highlighted in a 2007 US Government Accountability Office Report. The core issue revolves around the potential conflicts of interest arising from dual services, where PAFs act as both consultants to issuers and advisors to investors. This dual role raises questions about the objectivity of advice and the influence PAFs may exert on corporate statements they themselves have influenced.


The challenge of conflict-of-interest manifests in various forms, including dual service conflicts, relationships between PAFs and issuers, potential interests of PAFs in issuers, and the relative influence of one investor client on the advice given to another. Each dimension underscores the complexity of maintaining impartiality in an industry where conflicting roles are inherent.


The proxy advisory industry faces nuanced conflicts beyond direct consultancy, as owners or executives with substantial stakes may serve on boards with proposals under advisory review. Instances reported by ISS and Glass Lewis reveal a cautious approach, abstaining from voting recommendations to mitigate perceived conflicts. Additionally, PAFs owned by entities offering diverse financial services, such as ISS and Glass Lewis, confront challenges aligning interests among varied client sets, reflecting broader dilemmas within the financial services industry.


Conclusion: A Force for Good Governance?


In summary, while SEBI’s regulatory efforts, including the SEBI Regulations and the Procedural Guidelines, indicate a commitment to overseeing PAFs but specific loopholes undermine their effectiveness.


A crucial concern centers in the lack of explicit guidance on addressing conflicts of interest. Without detailed instructions, ambiguity persists, allowing for varying interpretations and potential gaps in conflict management, compromising the goal of fostering good governance. Regarding methodologies, while the guidelines touch upon disclosure, the absence of standardized criteria for evaluating adequacy and transparency is a specific shortcoming. This gap may result in divergent standards across PAFs, diminishing the reliability of their recommendations. Lastly, the guidelines outline several requirements for proxy advisors, but there is a lack of clarity regarding the enforcement mechanisms or penalties for non-compliance. This could potentially weaken the effectiveness of the guidelines.


In assessing the overall impact, these identified loopholes need targeted attention. Future reforms should focus on fortifying monitoring mechanisms, enhancing the specificity of guidelines, and establishing standardized criteria for evaluating methodologies. Only through such precise adjustments can PAFs evolve into a force that consistently contributes to good governance in the Indian corporate landscape.

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