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. 

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.