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The Securities and Exchange Board of India’s (Sebi's) planned research analyst regulations will also apply to proxy advisory services which provide advice on corporate governance and issue voting recommendations to institutional shareholders regarding company resolutions.
The norms would require them to maintain a minimum net worth, disclose the extent of research behind their recommendations, and policies on interacting with and getting responses from the companies on which they are issuing reports.
“Many developed markets don’t have regulations for the industry... The amount for net worth is not huge but one will have to keep monitoring these things and the compliance burden goes up as a result,” said an official at one firm.
“The net worth requirement for such firms is not something we are in agreement with as a principle, though compliance should not be a problem. Also research analysts and proxy advisers are different on a fundamental level, so I am not sure that it would be appropriate to bracket the two together,” said an executive at a second proxy advisory firm.
Sebi requires research analyst entities to have a net worth of at least Rs 25 lakh if they are corporate bodies and limited liability partnerships under the draft research analyst regulations. Individuals and partnership firms are required to have a net worth of at least Rs 1 lakh.
The new norms were finalised in Sebi’s June board meeting but are yet to be published in the Official Gazette, which would give it the effect of law.
It was earlier believed that they might be kept out of the ambit of research analyst regulations, since they did not give ‘buy’ or ‘sell’ recommendations like typical research reports.
“There is a need for regulation of such analytical services inter alia to ensure that such recommendations/advices are unbiased, independent, objective and there is no conflict with other activities... Thus, proxy advisers shall be registered and regulated under the draft regulations,” according to the minutes of the Sebi board meeting in June, which includes a draft copy of the new regulations.
Adding: “In case of any inconsistency or difficulty in respect of applicability of provisions of these regulations to proxy advisers, the Board may issue such clarifications or exemptions as may be deemed appropriate.”
The regulations also eased a proposed rule under which research reports by entities located outside India would only be permitted if they had a local presence.
“The requirement for incorporating an Indian subsidiary or establishing an Indian office may be onerous and, therefore, has been replaced with a requirement to enter into an arrangement with a research analyst or research entity registered as research analyst under the regulations,” it said. The local entity can distribute the third-party reports.
The regulations also sought to remove a conflict of interest between those providing research services and associate firms which deal with the company.
“The compensation of individual research analyst shall be determined by board of directors/committee of directors of the research entity which does not consist of representatives from the merchant banking or investment banking or brokerage services department,” it said.
There is a framework for regulating research analysts in a number of countries, including America, Britain, Hong Kong and Singapore. However, there has been little in the way of regulating proxy advisory firms.
A publication from the US Securities and Exchange Commission recently came out with suggested guidelines on the responsibilities of investment advisers in retaining proxy advisory firms, though this is not a regulation and also does not have ‘official’ status.
The Canadian Securities Administrators has also come out with a consultation paper on the potential regulation of proxy advisory firms.
“This does not send a good signal to institutional investors. Proxy advisory firms allow them an outlet to raise issues of governance. This benefits not just them but also the rest of the market, including retail investors,” said one of the people quoted above.
