SEBI's Rule On Promoter Disclosures Will Now Cover These Agreements

The proposal was approved by the markets regulator in its March board meeting and was made effective from July 16.

<div class="paragraphs"><p>(Source: Vijay Sartape/BQ Prime)</p></div>
(Source: Vijay Sartape/BQ Prime)

The Securities and Exchange Board of India's amended disclosure norms for listed companies have come into effect.

According to the revised regulations, listed companies must now disclose all agreements made by promoters, directors, key managerial personnel, employees, etc., with a company or third parties if they have a significant impact on the control or management of the listed company.

All such existing and future agreements will need to be disclosed, even if the listed company is not a party to them.

The proposal, which was initially made in February, was approved by the markets regulator in its March board meeting and was made effective on July 16. However, unlike the proposal, the notified regulation doesn’t require such agreements to be approved by the shareholders.

The disclosure requirement is based on the material nature of the agreement, says Lalit Kumar, partner at JSA Advocates and Solicitors. There is no identified list of agreements that need to be disclosed, he said.

The obligation to disclose will depend on the impact of the agreement on the control or management of a listed company or if it imposes any restriction or liability on the listed company.
Lalit Kumar, Partner, JSA

BQ Prime asked capital markets lawyers to elaborate on the kinds of agreements they are advising their clients to disclose. The list includes share pledge agreements, share purchase agreements, voting arrangements, letters of comfort, and succession planning.

Share Pledge Agreement/Share Purchase Agreement

Promoters and shareholders are free to pledge their shares to raise funds, just like any other asset. These are usually agreements between the promoter (pledgor) and bank (pledgee) and often don't include companies. However, according to SEBI's Takeover Regulations, pledge agreements that cross the specified threshold are subject to disclosure as they might be of significant concern to the listed company.

A promoter or shareholder with 5% or more shares or voting rights is required to disclose any change of over 2% in the shareholding, according to the regulations. This includes an acquisition by way of pledge.

There are no other specific provisions that mandate the disclosure of agreements that might otherwise impact the company, said Harish Kumar, partner at Luthra and Luthra Law Offices.

For instance, a promoter, as part of a share pledge agreement, might agree to certain clauses regarding the exercise of voting rights in contravention of the interests of the company.

He might agree to vote in a certain manner on particular resolutions that could have a significant impact on the management/control of the company, including future investments by the company.
Harish Kumar, Partner, Luthra and Luthra Law Offices

Similar clauses might also find a place in a share purchase agreement. These are contracts between a buyer and seller for the transfer of shares in the target company.

Kumar highlighted SPAs at the promoter entity level that could be subject to disclosure under the new rule.

An agreement between the promoter and an investor may provide for covenants that the listed entity will not issue new shares in the future at a price less than the price at which the secondary transaction would have happened at the promoter entity level.

"Such provisions may be construed as affecting the listed company’s capacity to raise funds," Kumar said.

Letter Of Comfort

A letter of comfort is an assurance that one party gives to the other that a certain obligation will be met.

Although these may not always be legally enforceable, such assurances undertaken by a promoter or a director that create any kind of obligation on the listed company would be subject to disclosure according to the new amendment, experts said.

For instance, a letter of comfort between the promoter and the lender for credit availed by the subsidiary company that creates an obligation on the assets of the listed company would now have to be disclosed.
Moin Ladha, Partner, Khaitan and Co.

Family Arrangements, Succession Planning

Although family settlements are already subject to disclosure under the existing SEBI (Listing Obligations and Disclosure Requirement) Regulations, they do not include a wide range of arrangements undertaken between family members, experts said.

The new amendment will now cover family charter or constitution documents or Memorandum of Understanding that provide a framework between family members to establish governance principles for future generations in relation to the business of listed entities, said Mehul Bheda, a partner at Dhruva Advisors.

This includes agreements between family members about decision-making in relation to certain matters of the listed entity, succession of business to the next generation, voting agreements, etc., as long as they have an impact on the management of the listed company, he said.

For example, if there is an understanding between two co-promoters about who will nominate the CEO and for what period, then that may have an impact on the management.
Mehul Bheda, Partner, Dhruva Advisors

In addition to these agreements, a promoter must now also disclose any agreements with third parties, including private equity firms, regarding upcoming transactions and investments, such as profit sharing agreements.

To elaborate, a private equity firm investing in the company may enter into an agreement with a promoter to provide an upside from any future sale of shares of the company if it crosses a certain valuation. This is usually done to incentivise the promoters to work harder for the company. This can be an example of something that will trigger a disclosure, said Bheda.

The new requirement comes with compliance concerns, experts said.

The decision about what could have an impact on the control or management of a listed company or impose any restriction or create any liability on the listed company will be subject to the facts of each case, said Lalit Kumar. "This will always leave room for interpretation and might lead to defaults on disclosures," he said.

It is also necessary to ensure that the disclosures do not contribute to information overload, said Ladha. According to him, the company should evaluate the possibility of the event, its legal enforceability, and its impact on control and management before disclosing such agreements in order to reduce information overload.