Sebi proposes change in governance norms to give more power to shareholders

India's market regulator has proposed changes to governance norms for listed entities that give more rights to shareholders, while increasing corporate disclosures on agreements binding them, a consultation paper showed on Tuesday.

Any agreements that impact the management or control of a listed entity or create a liability for it must be disclosed, the Securities and Exchange Board of India (SEBI) proposed in the consultation paper.

The regulator said it has come across instances where founders have entered into shareholder agreements with listed entities that in turn impose restrictions on companies.

Such rights are against the fundamental principles of corporate governance and shareholder democracy, according to the regulator.

The SEBI also suggested that shareholder approval be sought for any special rights granted to certain shareholders, including promoters, particularly where such rights may have been granted before listing.

In the so-called 'new-age tech companies', the regulator has observed that institutional investors are increasingly voicing their concerns against special rights given to founders and other entities connected to a company.

And even if the shareholding gets diluted over the years, these rights are available to founders/entities in perpetuity.

Any such special right shall be subject to shareholder approval once every five years, the regulator proposed while seeking views from stakeholders.

Amit Tandon, chief executive of proxy advisory firm Institutional Investor Advisory Services, says that in all its recent voting recommendations it has highlighted that shareholder rights cannot be available in perpetuity.

"The shareholders you start with may not be shareholders in the future. The new incoming shareholders should have right to look at the special rights granted to anyone. Ideally, all the special rights need to drop-off at the time of the company going public," said Tandon.

Starting April 1, 2024, the SEBI proposes that shareholder approval be made mandatory for any director serving on a listed company's board once in five years.

The suggestion comes in the context of board directors whose appointment or reappointment has not been subject to shareholder approval in the last five years. The regulator also wants to do away with anomaly where directors have been accorded protection via articles of association (AoA)- a company's internal document specifiying its governance and operations - as not liable to 'retirement by rotation' and without any defined tenure.

The regulator's relook comes following a tussle between Yes Bank and Dish TV Ltd in July 2022. Despite the shareholders, including Yes Bank, voting against reappointment of founding director Jawahar Goel as the chairman, he continued to remain as director since the AoA passed three months before Dish TV's market debut prevented him from retiring due to rotation.

The regulator has sought comments from stakeholders by March 7.