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One of the current significant intermediaries of corporate governance is Proxy Advisory Firms (“PAFs”) that work on the notion of advising or recommending institutional investors (“IIs”) to


One of the current significant intermediaries of corporate governance is Proxy Advisory Firms (“PAFs”) that work on the notion of advising or recommending institutional investors (“IIs”) to exercise their voting rights in M&A proposals, and corporate restructuring. With SEBI imposing certain corporate governance standards through Clause 49 of the Listing Agreement, 2000, PAF has become a key intermediary in maintaining corporate governance strategy in such transactions. The services are offered by domestic as well as foreign proxy advisory companies in India. To keep an eye on the working of these advisory firms and to strengthen good governance norms, there is the SEBI (Research Analysts) Regulations, 2014 (“RA”) regulation which regulates nuances of proxy advisors and their working. However, the working of PAFs involves various key issues of independence of advisors, partiality in recommendations, and transparency which affects the roots of corporate governance. After the 2014 regulations, there are constant efforts by SEBI to mitigate the various issues but the issues are still prevalent in the current regulatory regime. In this background, this paper seeks to analyze the current regulatory framework and the issues involved then will critically analyze the changes made by SEBI under recent circulars and whether the regulations are sufficient and crystalized to resolve the issues.


Regulation 2(i)(p) of 2014 regulations defines a proxy advisor as, “any person who provides advice, through any means, to the institutional investor or shareholder of a company, concerning the exercise of their rights in the company including recommendations on public offer or voting recommendation on agenda items”. According to the Regulations, before beginning operations, every PAFs must get a registration certificate from SEBI. In addition to the overall requirement to disclose internal procedures and limitations on publishing research findings and recommendations, the Regulation also mandates that proxy advisors make specific disclosure. Under Regulation 23, proxy advisors are obligated to provide additional disclosures, which include i) the scope of research undertaken while issuing recommendations, and ii) the methodology and strategy adopted for interacting with issuers.  Proxy advisors play a significant role as their services are critical, given that the advice they provide has a substantial influence on the functioning of a company and has a significant impact on shareholders’ interests. The recommendations must be issued with due diligence and Regulation 24(2) accordingly bounds a proxy advisor by the code of conduct to act honestly with credibility. The regulations mandate these firms to comply with the requirements and manage the conflict-of-interest conundrum and make recommendations accordingly which cannot hamper the shareholders’ interest. One of the instances is in 2015 when ITC Ltd. was advised by PAF to vote against the appointment of Deloitte Haskins & Sells (DHS). as its statutory auditors otherwise, it contravenes Section 139(2) of the Companies Act, 2013 and against the norms of corporate governance.

However, there are no express penalty provisions on proxy advisors under the RA regulations if there are any non-compliance or false recommendations made by PAFs. The regulations only provide for the code of conduct but it did not clearly define the responsibilities that are required to be fulfilled to carry out appropriate investigation and scrutiny. Further, SEBI should differentiate between the advisory services that PAFs provide to limited companies and the voting recommendations that they give to the shareholders of those companies. Merely disclosing conflicts of interest is not sufficient to eliminate the possibility of bias and self-interest among proxy advisors when making their recommendations. Therefore, in recent years, there are problems faced by the shareholders and it affects shareholder activism as these PAFs are working more than their work of recommendation and influence the institutional investors to expose lacunas in the existing regulation, and directions issued by the board. In light of these issues, in 2020 after the  Working group (WG) submitted their recommendations and suggestions, SEBI issued two circulars to make the working of these PAFs in check.


The circulars lay down Procedural Guidelines for Proxy Advisors. The First Circular on August 03, requires proxy advisors to formulate and yearly review their voting recommendation standards. A PAF is obligated to share its recommendation report with both the clients and the company in question, and each recommendatory document must explicitly mention any possible conflicts of interest. Any comments so received must be incorporated as an amendment to the report. This guideline is issued because of the recent cases of, HDFC bank (recommendation by foreign PAF) and ITC defamation case, where the recommendations for appointment of directors given by the PAFs was in question because of the lack of transparency between the PAF and the company which affects the internal corporate structure of the companies.

Further, in the Second circular on August 04, SEBI provided for a grievance resolution between the registered proxy advisors and listed entities. A system for addressing grievances has been established to empower minority shareholders, including institutional investors, to effectively engage in corporate governance decisions by utilizing their holding rights, following Regulation 4(2)(a) of the SEBI (Listing Obligation and Requirements) Regulation, 2015. However, the circular has given the option to approach SEBI only to the listed companies in case of any non-compliance by the proxy advisor and there is no grievance mechanism for unlisted companies to approach SEBI.

These circulars are also ambiguous regarding their applicability to foreign proxy advisory firms. Currently, it is not mandatory for a foreign advisory firm to be registered under regulations, and to only comply with Regulation 4 which is to agree with a research analyst who is registered with SEBI. It can be argued that the circulars, which are issued under the 2014 regulations, do not hold any legal obligation on foreign PAFs. This approach does not align with the 2019 WG recommendations, which suggest a mandatory code of conduct compliance by foreign PAFs. Moreover, there are no liability provisions under these circulars for any misconduct by PAFs. It is high time for SEBI to take a cue from major rival markets such as European Union and the US, which have revised the corporate governance standards around proxy advisory firms regularly. 


As time passed, people became more aware of concerns related to the transparency of PAFs, which had an impact on the standards of corporate governance that apply to companies. The Satyam and Nirav Modi scandals have reduced public trust in the securities market, making mutual funds and retail investors more cautious. As a result, Proxy Advisory Firms (PAFs) are becoming increasingly important in identifying governance breaches, and therefore it is pertinent to bring these firms under the scope of SEBI for transparency and to address concerns. The SEBI has taken a light touch in governing proxy advisers, leaving it primarily up to the proxy adviser’s discretion to implement proper policies, procedures, and safeguards to avoid inaccurate voting recommendations and conflicts of interest. By only providing a grievance mechanism for listed companies will not give any huge power in the hands of the investors but requires more participation of regulating authorities to expose these firms and their obligations to bring in transparency and this may ensure that proxy advisers are cautious in providing voting recommendations. Transparency between PAFs and publicly traded companies is crucial but SEBI only mandates proxy counsellors to addendum voting advice if the firm’s position changes. Proxy advisers are widely known for recommending voting practices and public offers that exceed legal requirements.; however, with the many regulations by SEBI, advisory firms’ recommendations become more complex and the issue of transparency between advisory firms and listed companies remains persistent and which might negatively affect shareholder activism. Therefore, to bring these firms under check and transparent working, the regulatory body has to come up with one comprehensive regulation which will regulate the working of these firms.


The notion of proxy advisors is still in its incipient stage and needs reforms to make it more crystallized. The advisory firms provided crucial support to shareholders throughout the years through business experience and in-depth research on exercising voting rights and recommendations on public offers. Though the current regulatory structure maintains checks and balances on proxy advisors, it falls short of imputing accountability for ethical and legal misbehaviour. These circulars are indeed issued on the notion of bringing transparency and accountability in the governance of these firms but it may solve the problem only to some extent and the aspersion of taking the shareholders’ shoes and controlling the company against the PAFs cannot eliminate. These circulars have not ideally solved the problem of a grievance mechanism, or transparency and it fails drastically in imposing liability on these firms for unethical and unlawful and leaves a grey area in the regulatory framework. These circulars are still not enough to safeguard the interest of minority stakeholders as they are not aware of the company’s actual position and thus affect shareholder activism.

Authors Name: Aayush Laddha & Rahul Tomar (National Law University, Jodhpur)