SEBI Proposes Measures To Strengthen Corporate Governance At Listed Entities

To strengthen the corporate governance at listed entities, capital markets regulator Sebi on Tuesday proposed a regulatory framework to address the issue of certain shareholders enjoying special rights perpetually.
     
In addition, the regulator has suggested measures to address the issues related to agreements binding listed entities and 'board permanency' at listed entities. Also, it is considering addressing the issue pertaining to sale, disposal or lease of assets of a listed entity outside the 'Scheme of Arrangement' framework.
     
The Securities and Exchange Board of India (Sebi) has sought comments from the public till March 7 on the proposal.
     
To address the issue of certain shareholders enjoying special rights perpetually, Sebi proposed that any special right granted to a shareholder of a listed entity should be subject to shareholder approval once in every 5 years from the date of grant of such special rights.
     
Further, the existing special rights available to shareholders should be renewed within a period of 5 years from the date of notification of the amendments to the LODR Regulations.
     
This comes amid public institutional shareholders are increasingly voicing their concerns against special rights being conferred upon the promoters,  founders and certain body corporates of those companies.
     
Sebi noted that shareholders agreements are drafted in such a way that those special rights (nomination rights) would continue to be available even after significant dilution of their holding in those entities.
     
This permits the shareholders to enjoy such special rights perpetually, which is against the principle of rights being proportional to one's holding in a company.
     
Also, Sebi suggested that all directors appointed to the board of a listed entity need to go through periodic shareholders' approval process, thereby providing legitimacy to the director to continue to serve on the board.
     
This would substantially address the concerns around grant of board permanency by listed entities to certain selected persons -- mostly promoter-directors or related persons --by invoking the rights conferred on it by the AoA of a company or by virtue of such persons being appointed as directors deliberately making them not liable to 'retirement by rotation' and without a defined tenure, Sebi said.
     
As on March 2024, if there is any director serving on the board of a listed entity without his / her appointment being subject to shareholders' approval during the last 5 years, the listed entity should take shareholders' approval in the first general meeting to be held after April 1, 2024, for his or her continuation on the board of the listed entity.
     
From April 1, 2024, the listed entity should ensure that the directorship of all directors serving on the board or appointed to the board is put up to shareholders for approval at least once in every 5 years.
     
Sebi has proposed that  agreements whose purpose and effect is to impact the management or control or impose any restriction or create any liability needs to be disclosed to the stock exchanges.
     
However, agreements entered by a listed entity for the business operations of a company -- supply agreements, purchase agreements etc -- has been proposed to be excluded from the scope of disclosures.
     
Also, the regulator has recommended measures to strengthen the  framework of slump sale executed outside the scheme of arrangement framework to safeguard the interest of minority shareholders.
     
Sebi has proposed to introduce provisions in the disclosure rules  for sale, disposal or lease of whole or substantially the whole of the undertaking of the listed company.
     
Also, it has suggested for mandating disclosure of the objects and commercial rationale for such sale, disposal or lease, to the shareholders.