India: companies, know thy rights – the right to rebut proxy advisors and the right to redress

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Rabindra Jhunjhunwala
Khaitan & Co, Mumbai
rabindra.jhunjhunwala@khaitanco.com

Saranya Mishra
Khaitan & Co, Mumbai
saranya.mishra@khaitanco.com

Proxy advisors (PA) have, for a long time lurked behind the fiduciary veil with investors and have consequently never been at the forefront of boardroom battles or shareholder activism. This is mainly due to the fact that there is limited interaction between the company and the PA due to lack of privity between them. While the PA business model varies from one PA to another, the most common and predominant model entails an arrangement between the PA and client which mostly is an institutional investor with voting recommendations for a company as the end product, without empanelment of such company for input. The necessary outcome of such an arrangement, more often than not, is ill-considered recommendation for institutional voting and a discontented company.

To address the shortcomings in such arrangements, the Securities Exchange Board of India (SEBI) released the Procedural Guidelines for Proxy Advisors on 3 August 2020 ('Procedural Guidelines') and Grievance Resolution between listed entities and proxy advisers on 4 August 2020 ('Grievance Resolution Circular') (collectively, 'SEBI Circulars').

The SEBI Circulars read together create a regulatory framework which reinforces the moral and ethical obligation to make full disclosure on the part of the PA.^[1] Although PAs were first regulated by way of Securities and Exchange Board of India (Research Analysts) Regulations 2014 ('RA Regulations'), the SEBI Circulars are an attempt to streamline the working process, instil elements of transparency in the business model and working, by requiring formulation of policies for voting recommendation, communication, sharing of recommendation and conflict of interest and clarify disclosure requirements.

Initially, the SEBI Circulars were to come into effect on 1 September 2020, which gave a window of approximately one month for proxy advisors to revise their business models and working. However, given current market and business conditions due to the Covid-19 pandemic and representations made by the registered proxy advisors, new circulars dated 27 August 2020 state that implementation has been postponed until 1 January 2021. This gives a four-month leeway for proxy advisors to bring their working arrangements into line with the SEBI Circulars.

What the SEBI Circulars mean for a company

The Procedural Guidelines ensure that a company has an opportunity of being heard by the PA, through the tri-fold mechanism of: (1) recommendation sharing with the company by the PA corresponding to recommendation sharing with the shareholder; (2) receiving comments from the company on the recommendations; and (3) modifying the recommendations basis of company comments and relaying the revisions along with the company comments to the investor in an addendum. Furthermore, this mechanism is emboldened by the fact that the company can approach SEBI, under the Grievance Redressal Circular, in case the Procedural Guidelines are flouted by the PA.

Ultimately, the SEBI Circulars recognise two crucial rights for the company. 

The right to rebut

As a supplement of right to be heard or the opportunity to be heard, the right to rebut as explained above is the right of the company to provide comments and/or clarify the PA’s recommendations.

The following are the key observations of which a company should be mindful in respect to this right:

• The right of the company is limited to rebuttal of the recommendations through comments and clarifications. This is also to say that the company is not entitled to either receipt of the addendum issued by the PA or sur-rebuttal to the revised recommendations of the PA. This is also to say that the right to rebuttal is only at first instance of the primary recommendations issued by the PA and does not extend beyond that.
• According to the Procedural Guidelines, the ‘timeline to receive comment from the company may be defined’ by the PA. Therefore, a view can be taken that the right to rebut is time limited with a deadline provisions. That is to say, the right can be exercised within a defined, limited time period but once the deadline is reached, the company cannot argue for its comments to be factored in by the PA in its recommendations, as a matter of right. However, nothing bars the company from formally or informally placing its comments or clarifications before the shareholders. In the same breath, it must be clarified that the latter as a practice would be counterintuitive and lead to a rather chaotic situation, leaving the shareholder bewildered.

The right to redress

By grouping company interest through the grievance remedy mechanism, SEBI has expanded the ambit of redress, which traditionally catered to the investor. However, there is limited clarity on the procedural aspects related to the remedy mechanism in the Grievance Redress Circular. 

The following are the key observations in respect of exercise of the right to have redress against the PA:

• The Grievance Redress Circular makes a limited mention of the listed company ‘approach[ing]’ SEBI. As would be clear, the mode of approaching SEBI is not stipulated. Accordingly, in the absence of explicit mention of mode of communication, a view can be taken that the companies may resort to any means of written communication such as registered mail or even email to communicate the grievance to SEBI.
• There is no stipulation on the process that would be followed by SEBI in examining, as to whether it would be adjudicatory in nature and document heavy, where the parties engage with each other or like a fact finding mission, where parties are dealt with in isolation from each other, and thus remains obscure. Additionally, there is no clarity on which department or committee within SEBI would be responsible for the examining the grievance received.
• It would be interesting to see whether SEBI Complaints Redress System (more commonly known as SCORES) which currently caters to investor complaints would be revamped to include complaints from companies in a similar fashion for streamlining the grievance redress mechanism in one place, factoring in consistency and ease of doing business.

On a concluding note, suffice to say, the SEBI Circulars have equipped listed companies with not only rights but also a mechanism for redress as a remedy for the violation of rights. However, the devil is in in detail, and only time will decide the success and effectiveness of these recent regulations on proxy advisors.