Should Sebi save analysts from their subjects?
In a first, a large listed company has sued a proxy advisory firm for defamation, seeking damages of ~1,000 crore.
While ~1,000 crore is a fraction of its annual profits for the plaintiff, it is many times the size of a small unit of analysts. Many on the Street see this as an attempt to silence criticism, and that is not in the interests of shareholders or corporate governance.
While such browbeating has been common and frequent against journalists and authors and took an extreme turn with an analyst assisting a Canadian securities firm a few years ago, the involvement of proxy advisors brings its own colour.
Unlike journalists, proxy advisors are registered by the Securities and Exchange Board of India (Sebi). The Sebi (Research Analysts) Regulations, 2014, notified in September, 2014, came into effect three months later.
The following extract from an FAQ issued by Sebi explains the position of proxy advisors under these regulations:
Who is a proxy advisor?
A “proxy advisor” means a 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 public offers or voting recommendations on agenda items. [Regulation 2(1) (p)].
Are proxy advisors required to obtain registration under the Research Analyst (RA) Regulations?
Yes. Proxy advisors are required to obtain registration from Sebi under the RA Regulations.
What are the additional requirements to be fulfilled by a proxy advisor?
All the provisions of Chapters II, III, IV, V, and VI of the RA Regulations shall apply mutatis mutandis to the proxy advisor. The proxy advisor shall additionally disclose the following: (i) 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; (ii) policies and procedures for interacting with issuers, informing issuers about the recommendation and review of recommendations. A proxy advisor is required to maintain the record of his voting recommendations and furnish them to Sebi on request [Regulation 23].
As the definition and explanations make it clear, giving voting recommendations on agenda items is an important function of a proxy advisor. This has been expressly stated in the regulations. This is what the Sebi-registered proxy advisor seems to have done in the present case too. There was a proposal which was on the agenda of the annual general meeting, and on that a recommendation was given.
Under the Sebi framework, there are two additional clauses for proxy firms, in addition to generic research firms as given above. They are supposed to explain the research involved in the particular recommendation and also disclose how they interact with and obtain the views of the issuers (companies). The companies have every right to protest and complain if these procedures were not followed.
There have been calls for Sebi to step in in this case and explain its position. If necessary, the regulator could implead itself in this case to protect the diversity of views in the market. Alternatively, issuers could be asked to first explore and exploit the remedies available within the Sebi framework.
Analysts and advisors take pains and incur costs to comply with Sebi’s regulations. It is natural that they expect Sebi to stand up for them in times of adversity. Some views to this effect have been expressed in the social media, including those by some past victims.
Even if this does not happen, let us hope that the learned courts consider all these relevant provisions and frameworks before coming to a conclusion on the merits of these allegations. That would be in line with analysts’ expectations.
Analysts and advisors take pains and incur costs to comply with Sebi’s rules. It is natural that they expect Sebi to stand up for them in times of adversity