* ISS says merger would decrease shareholder rights
* Loyalty scheme seen benefiting top shareholder Exor
* Shareholders to vote on cross-border merger on Aug. 1 (Adds details, context, quotes)
MILAN, July 23 (Reuters) - Proxy advisor ISS has recommended that Fiat investors vote against a cross-border merger of the Italian carmaker and its U.S. unit Chrysler at a meeting on Aug. 1, saying it would reduce shareholder rights.
Fiat completed the buyout of Chrysler earlier this year and is hoping to incorporate the two into Dutch-registered Fiat Chrysler Automobiles (FCA) to boost the world's seventh-largest carmaker's appeal with international investors and to pave the way for a U.S. listing planned for October this year.
"Despite the potential benefits of a NYSE-listing in attracting new investors, (the merger) would decrease shareholder rights," ISS said in its recommendation document seen by Reuters.
Fiat CEO Sergio Marchionne said earlier on Wednesday he was confident that the merger would be approved.
International investors normally follow recommendations of big proxy advisors. The advice from ISS could weaken Fiat's chances of securing the two thirds majority it needs to get the project approved.
A failure to secure approval to the cross-border merger could complicate the group's plans to list in the United States and secure funds for its ambitious five-year business plan.
The merged FCA is expected to be headquartered in London and have its tax domicile in Britain, Fiat has said.
ISS also raised concerns that the merger would tighten the grip on the company of holding group Exor.
Exor controls Fiat Chrysler via a 30 percent stake, but its voting power could rise to as much as 46 percent through a loyalty scheme put in place as part of the merger to reward long-term investors.
Smaller proxy advisor Frontis Governance has made the same recommendation against the merger, citing unequal treatment of shareholders and the unfair loyalty scheme, its founder Sergio Carbonara said.
"The idea of a second voting share is like a gift to Exor," Carbonara said.
(Reporting by Agnieszka Flak; Editing by Elaine Hardcastle)