Sebi for more teeth to shareholders to improve corporate governance

The Securities and Exchange Board of India (Sebi) has floated a consultation paper to amend norms for strengthening corporate governance at listed entities by empowering shareholders. The regulator has sought comments from the public on the same by March 7.

This move by the market regulator comes against the backdrop of the Adani Group saga, which has been bombarded by allegations of corporate mis-governance, stock price manipulation and several other wrongdoings by US-based short seller Hindenburg Research.

The can of worms opened by the short seller saw opposition parties led by Congress even question the regulator and exchanges for not taking adequate action to protect minority shareholders.

In its consultation paper, Sebi has listed proposals in four parts:
A. Disclosure and approval requirements for certain types of agreements that bind listed companies
B. Review special rights given to certain shareholders as per the Articles of Association of a listed company
C. Sale or lease of assets of a listed company outside the ‘scheme of arrangement’ framework
D. Addressing the issue of board permanency in listed entities

First, there is a need to mandate disclosure of all agreements that intend to restrict or create any liability on a listed entity as it is material information for the shareholders, Sebi said.

The non-disclosure of material information by companies creates information asymmetry and results in significant market reaction when it is known to the public at large and at a later stage.

Therefore, the regulator has proposed to introduce a new clause with respect to disclosure and approval requirements for certain types of agreements.

Further, from April 1, the details of the aforesaid agreements entered during a financial year by a company must be disclosed, Sebi said.

Secondly, to attract investments in a company prior to listing, special rights are offered to pre-IPO investors and promoters. These special rights are included in the shareholder agreements executed between the company and the pre-IPO investors or promoters.

Sebi proposes to cancel all such existing shareholder agreements or modify them to the extent that special rights available to certain shareholders are terminated before listing.

Thirdly, to strengthen the framework of slump sale executed by companies outside the scheme of arrangement framework in order to safeguard the interest of minority shareholders, Sebi plans to introduce provisions in the current regulations to mandate disclosure of the rationale for such sale or lease to the shareholders.

Lastly, the regulator felt the need for introducing periodic shareholders’ approval for all categories of directors of a listed entity, whether executive or non-executive.

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