Consultation paper on strengthening corporate governance at listed entities by empowering shareholders.
Background
The SEBI has proposed certain amendments in order to strengthen corporate governance at listed entities by empowering the shareholders to address the following issues:
- Agreements binding listed entities;
- Special rights granted to certain shareholders;
- Sale, disposal or lease of assets of listed entity outside the ‘Scheme of Arrangement’ framework and
- Board Permanency ‘at listed entities.
The proposals and issues are explained in parts A to D. First two are explained below, next two will be
explained in the upcoming update.
PART – A: DISCLOSURE AND APPROVAL REQUIREMENTS FOR CERTAIN TYPES OF AGREEMENTS THAT BIND LISTED ENTITIES
Background
In the existing provision of LODR Regulation, Agreement which binds entities and are not in normal course of business shall be disclosed to shareholder and promoter as material information. If in case listed party is not a party to the agreement then it is obligation on the part of parties entering such agreement to disclose it to the company so that it in turn it can further disclose it to stock exchange.
There were some instances where promoters have entered into binding agreements with third party which had Impact on the management or control of a listed entity or such agreements have placed restriction on the listed entity, however, these were not disclosed to the listed entity and its shareholder. These restrictions, particularly when imposed without approval of the listed entity, and with no benefit to the listed entity caused trouble for entity.
Proposed Amendment
The proposals with respect to agreements which are to be entered in future:
- Disclosure under regulation 30 of LODR Regulations: Agreements which has direct or indirect impact on the management and control of the listed entity or imposes any restriction or creates any liability on entity shall be disclosed to stock exchange whether the listed entity is a party to such agreement or not.
- Provided further that only such agreements which binds entity, entered into by the shareholders, promoters, promoter group, related parties, directors, key managerial personnel, any other officer of a listed entity or of its holding, subsidiary, associate company, solely or jointly with the listed entity or a third party shall be disclosed.
- Disclosure in the Annual Report of the listed entity: In addition to the disclosure requirement in regulation 30, every listed entity shall disclose such agreements in their annual report from 1st April, 2023.
- Obligation to inform listed entity: Agreements entered by shareholders, promoters, promoter group, related parties, directors, key managerial personnel, any other officer of a listed entity or of its holding, subsidiary, associate company, in which listed entity is not the party in point 1(a), shall inform the listed entity within 2 working days from the date of entering such agreement.
- Board’s opinion and Shareholder’s approval: For any future agreement, the BOD shall provide its opinion along with its rationale as to whether such agreement is in the economic interest of the listed entity. Further, all such agreements shall not be effective unless and until it is approved by the shareholders of the listed entity through special resolution in AGM or EGM.
The proposals with respect to agreements that are already in existence:
- Disclosure of existing agreements: Existing agreements shall be disclosed to stock exchange on or before 30th June, 2023. Also, such agreement shall be disclosed in the Annual report of the listed entity for FY 2022-23.
- Obligation to inform the listed entity: Agreements entered by shareholders, promoters, promoter group, related parties, directors, key managerial personnel, any other officer of a listed entity or of its holding, subsidiary, associate company, in which listed entity is not the party in point 2(a), shall inform the listed entity on or before 31st May, 2023.
- Board’s opinion and Shareholder’s approval: The agreements shall be placed before the shareholders for consideration in the first general meeting (AGM or EGM) of the listed entity held after April 1, 2023, for ratification and its future obligations will also be decided basis such ratification. Also, Board of Directors shall provide its opinion along with detailed rationale as to whether such an agreement is in the economic interest of the listed entity.
PART – B: REVIEW OF SPECIAL RIGHTS CONFERRED TO CERTAIN SHAREHOLDERS AS PER THE AOA OF A LISTED ENTITY.
Background
Generally special rights are offered to pre-IPO (Initial Public Offer) investors and its promoters to attract
investment in company prior to listing. Some of the common types of Special rights are Nomination rights, Anti-Dilution right, etc. In terms of SEBI, an IPO issuer is required to provide a statement that the shares allotted in the public issue are equal in all respects, including dividends, with the existing shares issued by the company prior to the public issue.
The underlying principle is that the shares issued in the IPO shall rank equally with the existing shares and any right which is not available to other shareholders, is not to be permitted to survive after listing. For a company coming up with an IPO, all the existing special rights are cancelled or modified.
Proposed Amendment
In order to address the aforesaid issue, it is proposed that any special right (existing / proposed) granted to a shareholder of a listed entity shall be subject to shareholder approval once in every 5 years from the date of grant of such special rights. Further in case of existing special rights available to a shareholder shall be renewed within a period of 5 years from the date of amendment notification to the LODR regulations.
SW Remark: SEBI has proposed above amendments to strengthen corporate governance at listed entities.
Public comments may be sent by an email to consultationcfd@sebi.gov.in no later than March 07, 2023.
Muskan Rawat, Audit Associate, SW India
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