The Securities and Exchange Board of India (Sebi) on Friday tightened corporate governance norms on compensation agreements between promoters and private equity (PE) funds so that they wouldn’t cut other shareholders out of the loop and allowed foreign portfolio investors to invest directly in corporate bonds without a broker.
The markets regulator also approved raising the ceiling on shares reserved for employees in public issues to Rs 5 lakh from Rs 2 lakh.
New Listing Agreement Norm
“Instances of private equity funds entering into compensation agreements with promoter-directors and key managerial personnel of listed invested companies, based on the performance of such companies, have recently come to light,” Sebi said in a press statement. “However, when such reward agreements are executed without prior approval of shareholders, it could potentially lead to unfair practicesRs
The regulator said it will add a new provision to the listing agreement that would require disclosures and prior approval of shareholders. “If companies already have profit-sharing agreements, it would have to be informed to SEs,” said S Raman, Sebi whole-time member. “Approval would also have to be obtained from their boards and shareholdersRs
Sebi will finalise rules on this after seeking public comments.
An example of what Sebi was referring to was a PE firm agreeing with a promoter to transfer 20% of the profit earned in excess of a 30% internal rate of return on the sale of shares. “Till now, it was a market practice in the unlisted space but it seems to be growing in listed companies too. This would tackle the issue of conflict of interest,” said Sumit Agrawal, partner, Suvan Law Advisors and ex-Sebi official.
Merchant bankers said the move would enhance transparency. “All such transacions should need public shareholder approval so that no undue advantage is taken at the cost of public shareholders,” said Pavan Kumar Vijay, founder of Corporate Professionals, a corporate advisory firm.
The Sebi board also allowed category I and II foreign portfolio investors (FPIs) to directly access the corporate bond market without brokers, similar to domestic institutions such as banks and insurance companies. But access to over-the-counter and electronic book provider platforms will be allowed to FPIs only for proprietary trading.
“It will help deepen the corporate bond markets by infusing more liquidity in the system and result in greater price discovery,” said Tejesh Chitlangi, partner, IC Legal. “This will also ensure a level playing field between such FPIs and Indian domestic institutionsRs
The Sebi board on Friday met at the new campus of the National Institute of Securities Markets (NISM) at Patalganga near Navi Mumbai. NISM was established by Sebi to lead educational initiatives to enhance the quality of securities market professionals in India and abroad.
Sebi Chairman UK Sinha sought to address concerns of the regulator’s staff over recent raids by the Central Bureau of Investigation. The “Sebi Act has provisions to safeguard employee interest,” he said.
The Sebi board had in 2009 proposed to the finance ministry that an amendment be made to Section 23 of the Sebi Act so that no external agency should be able to seek depositions from the regulator’s officials without the consent of the central government, in the case of the chairman and members, or the chairman, in the case of other officers.