SEBI strengthening governance and protecting minority shareholders

The Securities and Exchange Board of India (SEBI) notified the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (LODR amendment) on 14 June 2023. Among other matters, it sets out provisions to strengthen the mechanism in which an undertaking is sold or disposed of outside the court approval process and periodic shareholder approval for (a) special shareholder rights; and (b) directors on the board of a listed company.

The LODR amendment follows the spirit of regulation 4 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which sets out the principle of equitable treatment of shareholders in listed entities.

While any pre-listing special right is required to be approved by shareholders in the first post-listing general meeting in order to continue to be available to any select group of shareholders, it was observed that in some instances, promoter groups continued to enjoy special rights without the limitation of time. When incorporated appropriately through a shareholders’ agreement or inserted into the company’s articles of association, those rights could potentially have no sunset period despite a significant dilution in the shareholding of those entitled to such rights.

This led to concerns from public institutional shareholders and proxy advisers voicing concern against such perpetuity of special rights and permanency of board seats in listed entities, without the limitations of time or fall-away thresholds. Perpetual special rights were thus an issue between public institutional investors and promoter groups.

To address these concerns, SEBI now requires shareholder approval, on five yearly basis, of all existing and proposed special rights granted to a shareholder of a listed company. Under the LODR amendment, such special rights must be approved by the shareholders in a general meeting passing a special resolution once every five years starting from the date of the grant.

Regarding directors in perpetuity, the LODR amendment stipulates that from 1 April 2024, the continuation of non-executive and non-independent directors on the board of a listed entity must be subject to approval of the shareholders in a general meeting at least once every five years from the date of the appointment or reappointment. Every director on the board of a listed company on 31 March 2024, without the approval by the shareholders in the last five years or more, will now have to obtain shareholder approval at the first general meeting held after that date. Certain categories of directors, including independent directors, whole-time directors, directors appointed by courts or tribunals and nominees of the government or of a financial sector regulator are exempt.

In another move by SEBI that boosts shareholder empowerment, any sale, lease, or disposal of the whole or substantially the whole of the undertaking, as defined in the Companies Act, 2013, outside a court-sanctioned scheme of arrangement, will now be subject to a “majority of the minority” approval. In effect, the public shareholders will have the final say in such decisions. Any sale or disposal of the undertaking has to be approved by a special resolution which can only be acted upon if the votes cast by the majority of the public shareholders exceed the votes cast by public shareholders against the resolution. The object and commercial rationale for such disposal and the proposed use of the proceeds must be included in the explanatory statement attached to the notice of the shareholders’ meeting. This gives minority shareholders an effective voice in disposals following a private arrangement and aligns the process with the way undertakings are disposed of under court-sanctioned schemes.

To safeguard the interests of lenders and debenture holders, SEBI has confirmed that these requirements for approval of directors and special rights will not be applicable to financial institutions registered or regulated by the Reserve Bank of India under a lending arrangement in the normal course of business. Neither will they affect debenture trustees registered with SEBI in connection with debentures issued under a subscription agreement. The “majority of the minority” approval will also not apply to the disposal of an undertaking triggered by a covenant in a lending or debenture subscription agreement executed by such financial institution or debenture trustee.

The LODR amendment appears to be a step in the right direction towards SEBI’s stated aim of strengthening corporate governance and protecting minority shareholder interests.