In the past few years, corporate governance in India has seen various red-flags being called up by proxy advisors in major incorporates working in India. Instances such as red-flagging RIL's auditors which had a running tenure of more than 30 years, and recently giving a various recommendation in the Tata-Mistry Case or resolving major doubts in Crompton-Greeves Power Case, proxy advisors in India have outdone themselves in proving their worth for the Indian Economy.

In addition to these potentially beneficiary impacts, these proxy advisors have for the Indian Economy, there are a few drawbacks as well which needs to be addressed by the lawmakers and bring in necessary amendments as sometimes suggestions from such firms lead to major conflicts in a company proving out to be very disadvantageous for the Indian Economy.

Another disadvantage that proxy advisors hold is that they are not subjected to any fiduciary duty present their recommendations to be in the best interest of shareholders and the corporations. Various studies have shown that ratings that are being used by these proxy advisors do not accurately signify or represent the subject's performance on whom the facts are based.

Experts have recently discovered that there have been opposite opinions diametrically on the same issue in such firms. Many experts worry that there might be various Concerns that proxy advisors have in some instances provide dissatisfactory recommendations to bring forward their own interests. These studies also highlight another issue that even after any error in the work of these proxy advisors is highlighted, such errors have not always been rectified by them. All such factors prove that bringing necessary changes by the regulatory bodies like bringing changes in clause 49 of the Listing Agreements of SEBI or bring new laws like the SEBI (Research Analyst) Regulations, 2014 is the need of the hour.

Proxy Advisory Firms In Corporate Governance In India

The Comptroller and Auditor General of India (CAG), recently raised red-flags on a huge sum of ₹1.6 billion which was part of excess cost, recovered by Reliance Industries Ltd (RIL). CAG also mentioned in its report about state-owned ONGC's gas which flows into the eastern overseas fields of Mukesh Ambani owned Reliance Industries plants. CAG, also stated that a KG-D6 area of 831.88 square kilometres is required to be taken from RIL, with respect to the contract of the company and cost of discoveries which were renounced earlier, but now should not be permitted to be retrieved in any form from any kind of sale from that area.

In another major case, after reviewing its decision, Institutional Investor Advisory Services (IiAS) have now presented its consent and given support to the decision for removal of Nusli Wadia from the board of Tata Motors and Steel, stating the main reason behind this decision being that it was a decision that was in the interest of Tata Group. The investigative authorities said case are looking into allegations such as the usage of land assets and company funds, borrowings of the company as against the assets of the company and all kind of vendor transactions with all promoter-connected entities related to the business.

Very recently, in the case of Crompton-Greeves Power, a huge amount of money was depreciated for the minority shareholders due to the reason of lack of effective corporate governance and conflict of interest in the company. SEBI appointed MSA Probe Consulting, to prepare an audit report and to investigate on allegations against Thapar and CG Power. The audit report by the company raised red flags because of the conduct of the auditor working at that time and because of what role the banks were playing in allowing the transactions.

In light of such events, experts feel that there is a major need to set higher standards in corporate governance norms in India. Globalization might be an important factor that might make the government realise the need for a governance system that works globally which will majorly affect the Indian economy by influencing Indian companies. With respect to powers and authorities given to SEBI, it plays a major role in imposing and setting higher standards for the corporate governance imposed on listed companies, as according to clause 49 of the Listing Agreements of SEBI have mandated the companies which are listed as according to guidelines of SEBI to follow with corporate governance structure set up in the country.

Such aspects of the governance of the companies include board of directors of the company, an independent audit process working in the company, transparency and disclosure practices, remunerations, various certification by the chief executive officer such other necessary documents. Proxy advisors inspect various such aspects and influence them for maintaining an effective corporate governance policy of the company. But often they make huge mistakes as they offer voting advice to the shareholders of the same companies as to whom they provide corporate governance recommendations which eventually leads to a conflict of interest. Experts fear that these advisory firms are not subject to any fiduciary duty which indicates that their recommendations are in the interest of shareholders and the corporations.

Recent Regulatory Developments In India

SEBI introduced SEBI (Research Analyst) Regulations in 2014 to meet the requirements of Indian markets, according to which various entities have to register with SEBI and follow the internal policy laid down. This regulation imposes a fiduciary duty on the companies to offer detailed disclosures when required by the government or regulatory authorities. The proxy advisors must give unbiased advice based on reliable information provided to them. A Code-of-Conduct for firms and their employees will be drafted which would cover the honesty and good faith, insider-trading, conflict of interest, diligence, or front-running and other such factors.

SEBI has also introduced Procedural Guidelines and Grievance Resolution mechanism for the proxy advisors and the listed companies. These changes are the result of SEBI's Working Group which recommended significant improvements in its report by establishing a well-defined code-of-conduct which is proxy advisors have to act in accordance with, on a basis of comply or explain. According to one of the procedures, the firms are required to share the recommendation to the subject company and their response to such suggestions, as this will allow subjects to clarify on the various aspect which it considers to have not been regarded while extending the proxy recommendations.

Analysis And Suggestions
Experts suggest that the retail investors, might not be able to be present all the AGMs and EGMs of companies owned by them. But if they are dedicated and conscientious, they can choose a method of e-voting in big decisions of the company. Shareholder's votes have great potential of bringing changes in corporate decisions and governance of a company which will eventually affect the market and economy.

Therefore, there lies a fiduciary responsibility on the institutional investors, to vote in the best interest of the company by having huge relevance to the recommendations made by the proxy advisors. Also, Necessary changes are required in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for the companies which are listed and their management to work with respect to SEBI's process formed with respect to Section 15Y, 20A of SEBI Act, 1992.

Having higher standards of transparency and oversight will certainly enhance the quality and credibility of this intermediary. Such aspects require that investors take the ultimate decision based on the proxy advice and the company's responses thereto, which would lead to the more-informed exercise of voting rights and at the same time ensure that proxy advisors do not control the voting. This sector needs nurturing at the hands of regulators and this could prove to be a major step. But time will only tell how these rules perform.

Conclusion
As the notion of proxy advisory has just emerged in India and still is in the stage of rapid development, it would be very early to form any perception about its good or bad effect on the Indian Economy. Although, basic interpretation can be drawn based on various latest circumstances that even if proxy advisors are at their primary stage, they are still proving out to be being efficient in keeping up investor voting decisions. They are maintaining the swiftness with the laws enforceable in India and are performing good in the maintenance of global corporate governance.

Although the existing law requires various changes and amendments for a better and smoother running of proxy firms in India, but as proxy firms are just an emerging concept in India it is too early to say that if it will fail or succeed based on the current situation they are out doing themselves at some instances and are failing majorly at others so better laws and regulations are required to be framed by the regulatory authorities which should be based on suggestions and reviews of the experts working in such field and bringing such changes at right time without delay is a must for seeing proxy advisors flourishing in the Indian market and eventually leading to the development of Indian economy.

Written By

1. Aayush Akar, Author, National Law University Odisha
2. Gaurav Gupta, Co-Author, Amity Law School, Noida