Author: Sonal Gupta, IV Year of B.A.,LL.B(Prog.), from Symbiosis Law School, Hyderabad (Symbiosis International University, Pune)
Introduction
As a corporation has no physical presence, it must appoint an individual to attend and act on its behalf at a general meeting or annual general meeting of a company in which it holds shares. This can be done by appointing one or more individuals to act as:
its proxy, or
its corporate representative
A proxy is a person who is designated by a member of a company to attend a general meeting and vote in place of that member. Section 136 of the Companies Act 1963 provides that any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a member or not) as his/her proxy to attend and vote instead of him/her. A proxy so appointed shall have the same right as the member to speak at the meeting and to vote on a show of hands and on a poll. India, one of the fastest emerging economies, has witnessed the birth of its own proxy advisory industry a few years back.
Indian Proxy Advisory Industry
“In India, institutional investors, like mutual funds, insurance companies and foreign institutional investors, had significant shareholding in listed companies. Till the the late eighties, many institutional investors in India were owned by the government of India.
They traditionally remained passive investors and always supported the promoters on governance issues. The private institutional investors came into the market in a big way in the nineties. But they also continued to remain passive. The entry of foreign institutional investors in the Indian stock market in the mid and late nineties changed the environment to a certain extent as they tend to be more active in governance issues.
In the year 2000, the financial market regulator Securities Exchange Board of India (SEBI) had come out with structured corporate governance norms for the listed companies through Clause 49 of the listing agreement. Still, the domestic institutional investors continued to remain passive and seldom involved in governance issues.
Hence the question of voting against management-proposed resolutions in shareholder meetings did not arise at all. So the proxy advisory industry was non-existent in India.
In 2009, Indian financial market was shocked by a huge corporate scandal in one the prominent software services firm ‘Satyam Computer Services Ltd’. SEBI took many measures to avoid such scandals again. One such step was to come out with a regulation in February 2010 which demanded more transparency in the voting by Indian mutual funds in the resolutions of shareholders' meetings of their investee companies.
The regulation required mutual funds to disclose their general policies and procedures to determine the manner in which voting rights could be exercised on the shares held by them. Mutual funds were also required to disclose on their website the manner in which they exercised their votes on resolutions in shareholder meetings. When SEBI came out with mutual funds voting disclosure requirements regulation in February 2010, some entrepreneurs sensed that this was the moment for the proxy advisory industry in India.
They were aware that the proxy advisory industry took off in a big way in the USA after SEC came out the regulation requiring the mutual funds to disclose their voting records and the same could happen in India.”
Conclusion
“The pattern of emergence of the proxy advisory industry is being repeated in India also with the arrival of three proxies advisory firms. However the growth of the proxy advisory industry in India may not be similar to that of the USA as ownership pattern of listed corporate entities in India is different from that of the USA.
It also provides its own unique research questions for the proxy advisory industry in India. The proxy advisory industry in India is just five years old, no research work has been published so far. The research scope for the Indian proxy advisory industry is different from that of the US market.
The conflict of interest situation does not exist as the Indian market is yet to reach stage where companies seek professional advice on corporate governance matters. However, the other major research issue of the influence of proxy advisory firms on voting patterns of institutional investors is valid in the Indian context too, though for different reasons. The major problem in the Indian corporate governance system is the lack of awareness among the investors about the seriousness of corporate governance problem in their investee firms.
The lack of awareness resulted in a lot of indifference towards the corporate governance practices of the firms, particularly among the domestic financial institutions."However, it would be interesting to test whether the situation has improved or not since 2010.”