The Securities and Exchange Board of India (Sebi) has proposed to put a stop to the practice of certain directors occupying permanent board seats at listed companies. The regulator has proposed that the directorship of any individual serving on the board should be subject to periodic shareholders’ approval at least once in five years.
Sebi has said that a few promoters enjoy permanency on the board which gives them an undue advantage, prejudicial to the interest of the public shareholders. The issue had come into focus last year when a tussle had broken out between Dish TV’s erstwhile promoters and Yes Bank over the not-liable-to-retire tag enjoyed by Jawahar Goel.
There are two ways by which an individual can occupy a permanent seat on a board –by having a clause inserted in the Articles of Association (AoA) or by getting appointed on the board as a director not liable to ‘retirement by rotation’ and without any defined tenure.
In a discussion paper, Sebi has proposed if as on March 31, 2024, there is any director serving on the board without obtaining shareholders’ approval during the previous five year period, such listed entity will have to take shareholders’ approval in the first general meeting to be held after April 1, 2024, for the continuation on the director on its board. Subsequently, companies will be required to obtain shareholders nod at least every five years for all director positions.
It couldn’t be immediately ascertained how any directors at listed companies would be impacted by this proposal.
In the same discussion paper, Sebi has made few other important recommendations around binding agreements at listed entities, special rights given to certain shareholders and slump sale by listed companies without obtaining shareholders’ approval.
Typically, to attract investments in a company prior to listing, special rights are offered by the company to its pre-IPO investors and the promoters. These special rights are included in the shareholder’s agreements executed between the company and the pre-IPO investors.
In order to address the issue of certain shareholders enjoying special rights perpetually, Sebi has proposed that any special right (existing / proposed) granted to a shareholder of a listed entity shall be subject to shareholder approval once in every five years from the date of grant of such special rights.
Similarly, on the issue of binding agreements, the regulator has said any agreement that impacts the management or control or imposes any restriction or creates any liability, should be adequately disclosed by the listed entity. Sebi, however, has said any agreements entered by a listed entity for the business operations of can be excluded from the scope of such disclosures.
The regulator has also proposed safeguards to prevent slump sales executed outside the scheme of arrangement framework to protect the interest of minority shareholders.
In addition to a special resolution, Sebi has any sale, disposal or lease of whole or substantially the whole of the undertaking can be acted upon only if the votes cast by the public shareholders in favour of the proposal are more than the number of votes cast by the public shareholders against it.