SEBI Proposes A Fix For Secret Agreements, Special Rights, Permanent Board Seats

All material agreements between shareholders impacting control or management of the listed entity will soon need to be disclosed, according to a latest proposal by SEBI. 

The Securities and Exchange Board of India has noted that several agreements between shareholders could have a significant impact on the management of the company, even without the company being privy to them.

According to the markets regulator, there have been several recent instances where promoters have imposed serious restrictions on a company in their agreements with third parties. These agreements, according to SEBI, escape disclosure as the listed entity is often not a party to them.

Disclosure about such agreements, according to the proposal, will have to be made in the annual report of the company starting April 1, 2023. Promoters, related parties, and shareholders will be obligated to disclose these to the company within two working days.

The regulator has also proposed board and shareholder scrutiny of agreements, which impose liability or restriction on the listed entity.

• The board of directors will have to provide a detailed rationale as to whether the agreement is in the economic interest of the listed entity.

• Such agreements cannot be given effect to unless and until approved by the shareholders of the listed entity via a special resolution, that is , majority of minority must give its approval.

The proposals will apply to existing agreements too. The parties to the agreement, which impacts the management, control, places restrictions or liability on the listed company, will need to disclose it to the stock exchanges before May 31; the board will need to provide an opinion on it and it has to be placed before the shareholders for ratification on the first AGM or EGM post April 1 this year.

In its second important proposal, SEBI seeks to address perpetual or special rights enjoyed by some shareholders.

According to the regulator, special rights—a tool used to attract investments prior to listing—violate the principle of rights proportional to investment and must be curtailed. Therefore, it is proposed that any special rights be subjected to shareholder approval once every five years.

Any special rights under existing shareholder agreements will have to be renewed within a period of five years from the date of notification of amendment to the Listing Regulations, the proposal said.

Currently, sale of the company or a part of it can either be done through a scheme of arrangement approved by the National Company Law Tribunal or through a business transfer agreement.

While the former is heavily regulated and requires the approval of minority shareholders, the latter gives minority no say, SEBI has noted.

So, it has proposed to amend the regulations to mandate business reasons for such a sale, and that votes cast by the public shareholders in favour of the proposal must be more than the number of votes cast by the public shareholders against it.

SEBI has highlighted that few promoters enjoy permanency on the board, even after substantial dilution of their stake and after ceding control of the company, thereby giving them an undue advantage.

Proxy advisory firm IiAS had raised this issue last year, citing examples where directors have been embedded as permanent directors or chairpersons by naming themselves so in the company’s Articles of Association.

Now, SEBI has proposed to review the appointment of all category of directors:

• As on March 31, 2024, if there is any director serving on the board of a listed entity, without his or her appointment or reappointment by shareholders in the last five years from April 1,2019, approval will need to be taken in the first general meeting post April 1, 2024.

• Starting April 1, 2024, all directors serving on the board or appointed to the board will be able to continue if shareholder approval is given at least once in every five years.

Comments on these proposals can be presented to the regulator till March 7.