The Securities and Exchange Board of India ("SEBI") had released a consultation paper on 'Strengthening Corporate Governance at Listed Entities by Empowering Shareholders' on February 21, 2023 ("Consultation Paper"), and has consequently, on June 14, 2023 introduced certain amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("SEBI Listing Regulations") pursuant to the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 ("Listing Amendments"). The Listing Amendments will come into force on July 14, 2023 (except certain specified amendments which will come into force on the date of their publication in the Official Gazette).
This note focusses on the Listing Amendments in relation to: (i) certain agreements entered into by or in relation to listed companies; and (ii) approval by shareholders for special rights granted to shareholders.
Additional Disclosure Obligations in relation to Agreements
Types of Agreements to be Disclosed: The SEBI Listing Regulations require disclosure of certain events or information to the stock exchanges and pursuant to the Listing Amendments, the agreements required to be disclosed by the listed company now also include the following:
- agreements entered into by the shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel, employees of the listed entity or of its holding, subsidiary or associate company, among themselves or with the listed entity or with a third party, solely or jointly (whether or not the listed entity is a party to such agreements);
- agreements which, either directly or indirectly or potentially or whose purpose and effect is to, impact the management or control of the listed entity or impose any restriction or create any liability upon the listed entity; and
- any rescission, amendment or alteration of such agreements.
Agreements entered into by a listed entity in the normal course of business will not be required to be disclosed, unless such agreements, either directly or indirectly or potentially or whose purpose and effect is to, impact the management or control of the listed entity or the agreements are required to be disclosed in terms of any other provisions of the SEBI Listing Regulations. Further, the term "directly or indirectly" includes agreements creating obligations on the parties to such agreements to ensure that listed entity shall or shall not act in a particular manner.
Subsisting Agreements: In relation to agreements that subsist as on the date of notification of the Listing Amendments (i.e., July 14, 2023), the parties to the agreements will be required to inform the listed entity about the agreements to which the listed entity is not a party. In turn, the listed entity will be required to disclose all such subsisting agreements to the stock exchanges and on its website, within the timelines specified by the SEBI.
The listed entity will be required to disclose the number of agreements that subsist as on July 14, 2023, their salient features, including the link to the webpage where the complete details of such agreements are available, in the annual reports for the financial year ended March 31, 2023 or for the financial year ended March 31, 2024.
Disclosure Obligations: The shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel and employees of a listed entity or of its holding, subsidiary and associate company, who are parties to the agreements specified above, will be required to inform the listed entity about the agreements to which such a listed entity is not a party, within two working days of entering into such agreements or signing an agreement to enter into such agreements. The listed entity will then make the relevant disclosure to the stock exchanges.
Key Takeaways
Previously, only agreements (such as shareholder agreements, joint venture agreements, family settlement agreements (to the extent that it impacts management and control of the listed entity) and agreements/treaties/contracts with media companies) which were binding and not in the normal course of business were required to be disclosed, together with any revisions or amendments or terminations. This resulted in certain arrangements between promoters/shareholders and other related parties/third parties, which could potentially have an impact on the management and control of the listed entity or which placed restrictions on the listed entity, not being disclosed.
As the amendment addresses: (i) disclosure of all agreements that intend to restrict, or create any liability on a listed entity; and (ii) methods to overcome issues in relation to agreements that may be entered into by the promoters or shareholders with third parties, with or without the knowledge or consent of the listed entity, it creates an additional disclosure obligation on the promoters, shareholders and other parties to the agreements (instead of only on the listed entity). Further, the amendment aims to generally include within the purview of disclosure obligations any agreements, without an assessment as to materiality, whether directly or indirectly involving the listed entity.
This amendment also requires disclosure of existing arrangements involving listed entities which were not disclosed previously. Parties to agreements and the listed companies will be required to collate a list of all subsisting agreements entered into in relation to the listed company and provide such information to the listed companies/stock exchanges, as the case may be, within prescribed timelines.
It will be worthwhile to see whether parties make disclosures of subsisting agreements or would prefer to terminate such arrangements as the SEBI may take actions against such parties by determining that such arrangements are material and price sensitive, and accordingly, should have been disclosed under the previous regime.
Special Rights to Shareholders
In order to increase transparency and ensure that certain shareholders do not enjoy special rights in perpetuity and such rights are in proportion to their shareholding in the listed company, the Listing Amendments state that approval of shareholders by way of a special resolution (75% vote) for special rights is required as follows:
- New special rights: Approval of any special right granted to the shareholders of a listed entity, once in every five years from the date of grant of such special right.
- Existing special rights: Approval of any existing special right granted to the shareholders of a listed entity as on the date on which the amendment comes into force, within a period of five years from such date.
However, approval of shareholders will not be required for special rights granted by a listed entity to: (i) a financial institution registered with or regulated by the Reserve Bank of India under a lending arrangement in the normal course of business; or (ii) a debenture trustee registered with the SEBI under a subscription agreement for the debentures issued by the listed entity, if such financial institution or debenture trustee becomes a shareholder of the listed entity as a consequence of such lending arrangement or subscription agreement for the debentures.
Key Takeaways
Special shareholder rights, including board nomination rights, information rights, affirmative voting rights and transfer restrictions are often agreed between certain shareholders of listed companies (including investors and promoters) pursuant to shareholders' agreements. Such special rights which are also incorporated in the articles of association of companies, enable the shareholders to be involved in the management and decision-making of the company and also provide certain governance rights to shareholders as well as protection to minority investors/shareholders.
At the initial public offering ("IPO") stage, the shares that are issued pursuant to the IPO are required to rank equally with existing shares and, as a general matter, any right which is not available to other shareholders is not permitted to survive after listing. Accordingly, prior to an IPO, existing shareholders' agreements are either terminated altogether or amended to permit very limited special rights to the shareholders which include: (i) director nomination rights at the level of the board of directors; and (ii) information rights, subject to compliance with the SEBI (Prohibition of Insider Trading) Regulations, 2015. Any surviving special rights available to shareholders following the IPO are subject to approval of the shareholders. The Listing Amendments do not impact the rights to be granted at the IPO stage.
Once the company is listed, pursuant to the Listing Amendments, any special inter-se rights between shareholders of a listed company, as agreed under a shareholders' agreement and which are not available to the public shareholders, will need to be disclosed and approved periodically by the shareholders – this is applicable both to existing special rights and any new special rights. This will lead to greater regulatory scrutiny in relation to such special rights and grant additional control to the non-controlling shareholders in respect of governance of the listed entity. Such control may not necessarily be always relevant for the public shareholders, e.g., in case of any inter-se special rights between promoters.
Conclusion
The Listing Amendments strive to ensure that: (i) due governance processes are not circumvented by listed entities or other stakeholders to avoid disclosure; and (ii) all shareholders are able to take decisions that are in the best interests of the listed entity. While the Listing Amendments aim to create a more robust compliance framework and increase transparency and accountability at listed entities, such amendments will inevitably lead to additional compliance burden for listed entities and reduce flexibility to shareholders to enter into inter-se arrangements.
This insight/article is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.
