Uday Kotak Wants India To Regulate International Proxy Advisers

Veteran banker Uday Kotak has sought regulation of international proxy advisers after two such firms asked investors to vote against reappointment of Deepak Parekh on the board of HDFC Ltd., India's largest mortgage lender.

“We have seen the concentration of voting through global proxy advisory services, leading to concentration of voting power in the hands of a few global agencies,” Kotak, managing director and chief executive officer at Kotak Mahindra Bank Ltd., said on the sidelines of the listing ceremony of HDFC Asset Management Company Ltd. “This questions the very basis of well-run, widely held companies and diversified ownerships.”

Kotak Investment Banking was the lead manager for the initial public offering of HDFC AMC, which listed at a premium of 65 percent on stock exchanges.

Two U.S. proxy advisories—Glass Lewis & Co and Institutional Shareholder Services—had asked investors to vote against Parekh and two other board members—former Reserve Bank of India Governor Bimal Jalan and well-known accountant Bansi Mehta—citing the number of directorships they hold, lack of attendance and overall independence of HDFC's board.

While Parekh, with 33 years on the HDFC board, narrowly survived the votes against him, Jalan and Mehta quit a day before the shareholder vote.

Kotak recently led a committee constituted by regulator Securities and Exchange Board of India to review corporate governance norms applying to listed entities. It is on the recommendations of this committee that SEBI's regulations now require that any director above the age of 75 seeking reappointment must do so via a special resolution. In company law, a special resolution requires 75 percent of the votes cast in favour of the resolution.

Hence Parekh, who was up for reappointment as director on the HDFC board required a high number of votes in his favour. He won by less than 0.2 percent.

The Proxy Firms' Recommendations

ISS recommended investors vote against Parekh and Mehta as they were each on more than six public company boards.

ISS' proxy voting guidelines make clear that it will generally vote for the election of directors unless certain conditions are not met, one of them being—the director should not be on the board of more than six public company boards.

Glass Lewis recommended voting against Parekh and Mehta as in its assessment the HDFC board is not independent enough.

Jalan, who has been on the board of HDFC since 2008, had attended three of six board meetings thus not meeting the minimum 75 percent threshold that both proxy advisory company expect directors to meet.

Both proxy advisory firms apply self-styled higher governance standards than local law requires. These standards are published and available publicly.

Kotak said the “time has come for us to ask this question that if proxy advisory services in India are regulated, what about regulation of global proxy advisory services?”

Proxy Firm Regulations

In 2014, SEBI notified regulations for research analysts and including domestic proxy advisory firms with their purview. The regulations provide for qualification, certification, capital adequacy, management of conflicts of interest, disclosure requirements and such for research analysts. The same provisions apply to proxy advisory firms as well.

Additionally, a proxy advisory firm in India also has to disclose:

• The extent of research involved in a particular recommendation.
• Policies and procedures for interacting with issuers, informing issuers about the recommendation and review of recommendations.

The proxy adviser is also required by SEBI to maintain a record of his voting recommendations.

On the face of it, both ISS and Glass Lewis would seem to be in compliance with such provisions were they needed to adhere to them. Both firms are yet to respond to BloombergQuint's emailed queries.