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SEBI moots review of superior investor rights in PIPE deals

04 January, 2013

Private investment in public enterprises or PIPE deals could come under a scanner with the market regulator Securities and Exchange Board of India (SEBI) proposing a review on whether listed companies should be permitted to enter into an agreement granting superior affirmative rights to selective investors such as private equity firms.

The review of such PE investment agreements is part of a set of several of measures proposed by the regulator to tighten corporate governance norms for listed companies related to CEO compensation, strengthening role of independent directors and minority shareholders besides mandatory succession planning.

The proposals are part of the move to align the existing corporate governance norms which is currently enshrined in Clause 49 of the listing agreement with the new Companies Bill which was passed in the lower house of the parliament last month.

The market regulator noted that whenever a company seeks funds from a private equity investor or a financial institution, it will enter into shareholders/share subscription or investment agreement. Such deals typically straddle superior rights such as ‘tag-along’ and ‘drag-along’ rights.

It observed that sometimes these agreements also grant certain superior rights to these investors like access rights information (right to receive selective information), right to appoint their nominee directors in the board, requirements that the presence of their nominee is necessary to constitute a quorum etc. These rights are subsequently incorporated into the articles of the company by amending the articles.

The regulator also noted that in the case of Messer Holdings Ltd, Bombay High Court had on September 1, 2010, held that such consensual agreements between shareholders are legally valid.

“Though these rights are intended to protect the institutions investing their funds in these companies, since these rights are not available to all the other shareholders, especially

minority shareholders, it is debatable as to whether these superior rights may lead to oppression of minority. Apart from that, there are also concerns regarding selective sharing of price sensitive information to these investors,” it said.

The regulator said that presently there are no restrictions for a listed company to enter into such an agreement, as such an amendment to articles may not, presently, be in violation of clauses of listing agreement or SEBI Regulations.

In this regard, it has to be examined whether listed company should be permitted to enter into such an agreement granting superior affirmative rights to selective investors, Sebi said.

Key proposals

The proposals include possibility of appointment of independent directors by minority shareholders and exploring options where listed companies beyond a market cap need to be mandated to have at least one small shareholder director.

It also seeks to exclude nominee directors from the category of independent directors to align the provisions of Clause 49 with the bill.

Non-executive directors need to give a reason for their exit from a listed firm. Though this may not curb executives exiting on ‘personal reasons’, they would need to explain why they are not exiting from other directorships at the same time.

Directors’ performance should be evaluated based on attendance and contribution to the board/committee meetings and such appraisal shall be placed before the nomination committee for taking decisions for reappointment.

In case the company has an independent chairman, he/she shall act as the lead independent director and the post may be rotated among the independent directors every three years.

Independent directors would be expected to examine internal controls and general governance practices prevailing in the company and bring out any inefficiency to the attention of shareholders and their report in this regard may form part of the annual report.

Further, such meetings may also review the performance of the chairman, non-independent directors and the board as a whole.

Board’s nomination committee may be made responsible for ensuring that persons from divergent backgrounds and gender are nominated for maintaining board diversity.

The board of a listed company may be required to ensure that plans are in place for the orderly succession for appointments to the board and senior management. Further, the viability of mandatory disclosure of succession planning to board/shareholders at periodic intervals may also be examined.

It also seeks a review on whether risk management should be made the ultimate responsibility of the board or the responsibility can be delegated to the risk management committee or to the audit committee.

The feasibility of appointment of Chief Risk Officer/Risk Manager for large listed companies may also require consideration.

Further, it has suggested a look at whether more specific parameters/requirements such as framing a risk management plan, its compulsory monitoring and reviewing by a board/board committee and the disclosure thereof to the shareholders at periodic intervals (preferably on annual basis) be laid down in the listing agreement.

The regulator has called for public comments by January 31, 2013, on its proposals.

Other highlights

Strike a balance between fixed and incentive pay of top management and to disclose in the board’s report, the ratio of the remuneration of each director to the median employee’s remuneration.

Consider mandating approval of disinterested/minority shareholders for managerial remuneration beyond a particular limit.

Ask listed companies to provide postal ballot /e-voting facilities for all the resolutions to be passed at general meetings to enable wider participation of shareholders in the corporate democracy.

Lay down specific fiduciary responsibilities of controlling shareholders and also consider the feasibility of mandating relationship agreement between the company and the controlling shareholder specifying the duties and responsibilities of controlling shareholders.

Approval of major related party transactions through ‘majority of the minority’ principle to plug cases of abusive transactions by controlling shareholders.

Fund houses should be mandated to adopt the global practice of quarterly vote reporting and fund-wise vote reporting and to adopt detailed voting policies. Further, vote reporting by fund houses should also be subject to audit.

Consider corporate governance rating by the credit rating agencies, inspection by stock exchanges/SEBI or any other agency for verifying the compliance made by the companies and imposing penalties on the company/its board of directors/compliance officer/key managerial persons for non-compliance either in sprit or letter.

(Edited by Prem Udayabhanu)


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SEBI moots review of superior investor rights in PIPE deals

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