Corporate Governance Issues in Compensation Agreements

SEBI, in a consultation paper released by it on October 4, 2016, had noted the practice followed by private equity firms (‘PE Firms’) of entering into side agreements with senior management personnel and/or key managerial persons (‘KMP’) of listed companies (in which such PE Firms are shareholders). While SEBI acknowledged that it is not unusual for PE Firms to incentivize the promoters/ KMPs, it also raised concerns on potential unfair practices being resorted to by the promoters/ KMPs if such agreements were not approved by the board of directors and shareholders of such companies. Pursuant to the decisions of SEBI in the SEBI Board Meeting, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) have been amended with effect from January 4, 2017. The key amendments are as follows:

i. Restriction on all employees of listed companies (including KMPs, directors or promoters) from entering into an agreement with any shareholder or third party in relation to compensation or profit sharing regarding dealings of securities in such listed entity without the prior approval of the board of directors and public shareholders of the company by way of an ordinary resolution;

ii. All such agreements entered into during the previous three years (including those that have expired) are to be disclosed to the stock exchanges for public dissemination;

iii. Approval of the relevant company’s board of directors and its public shareholders is to be sought for all such subsisting agreements in the forthcoming board meeting and general meeting, respectively; and

iv. Interested persons involved in such transactions, i.e., persons who are directly or indirectly interested in the agreement or the proposed agreement, are not permitted to vote in such board / shareholder meetings to be held as per iii above.