- March 3, 2023
SEBI’s proposed amendments to empower shareholders and increase transparency in corporate governance
On February 21, SEBI, the market regulator in India, released a ‘Consultation Paper on Strengthening Corporate Governance’ proposing a series of governance changes to tackle various issues related to listed entities. The proposed changes include scrutinizing agreements that bind listed entities, revaluating special rights given to shareholders, managing assets of listed entities outside the arrangement framework, and addressing board permanency at listed entities.
At present, India’s corporate governance framework comprises mandatory and voluntary guidelines established by the Companies Act 2013, MCA guidelines, and industry-specific regulations. The Listing Obligations and Disclosure Requirements (LODR) Regulation is a pivotal component of this framework for listed companies. The proposed amendments in the consultation paper aim to fortify the LODR regulation, which is essential to ensure good corporate governance practices among listed entities.
It aims to enhance the rights of shareholders of listed entities while also strengthening the scrutiny of agreements that bind these entities. The proposed changes would empower shareholders by allowing them to participate in the approval process for certain agreements that were previously cleared only at the board level. SEBI also plans to review the special rights granted to certain shareholders, especially promoters, before listing to ensure that such rights are not permanent.
SEBI intends to eliminate the protection that promoter-directors currently receive via Articles of Association, which allows them to avoid ‘retirement by rotation’ and have an indefinite tenure. This issue came to light during the Dish TV-Yes Bank matter, where a Founding Director continued to hold the position despite shareholders voting against their re-appointment. Furthermore, SEBI proposes that all listed companies must seek periodic approval from shareholders for all categories of directors, effective April 1, 2024.
While SEBI’s proposals for periodic shareholder approval of promoter-directors have merit, it is important to acknowledge that India’s corporate landscape is primarily promoter-driven. In concentrated ownership patterns, the operational expertise and knowledge of the promoter directors may be more crucial than rotation. As such, it may be appropriate to implement periodic shareholder approval for promoter-directors only if empirical evidence supports the notion that rotation of such directors can enhance company performance. Blanket application of periodic shareholder approval for all categories of directors may not be appropriate in this context.
SEBI’s proposed norms represent a shift towards corporate control through shareholder empowerment. By inviting shareholders to participate in the decision-making process, SEBI aims to promote responsible decision-making and ensure that accountability for corporate scams is shared not only by the boards but also by the shareholders.
The consultation paper also proposes the disclosure of all agreements that impact the management and control of a listed entity. This includes the disclosure of agreements between promoters and third parties, to which the listed entity is not a party. This issue came to the fore after the ICICI Bank Videocon loan fraud case. However, agreements related to the operation of the entity’s business, such as supply or purchase agreements, will be exempted from this disclosure requirement.
The draft rules proposed by SEBI aim to safeguard the interests of minority shareholders by mandating the disclosure of objects and commercial rationale in cases of lease, sale, or disposal outside the arrangement framework. SEBI’s call for an overhaul of corporate governance norms follows several cases of massive mismanagement and governance catastrophes, including the Satyam scandal, the Kingfisher Airlines case, the DHFL fraud case, the Nirav Modi scam, the Tatas-Cyrus Mistry clash, the IL&FS financial crisis, and the Singh Brothers of Ranbaxy scandal. The suggested amendment will strengthen the framework for slump sales executed outside the merger and acquisition framework.
If implemented, the proposed changes in the consultation paper would be a welcome step towards enhancing the corporate governance framework by promoting shareholder democracy and increasing transparency. SEBI appears to be advocating for additional disclosure as shareholders’ ability to interact with each other and with management has been significantly enhanced by the increased accessibility of cyberspace. However, it is worth noting that maturity in processing or analyzing available information is yet to reach a developed curve among retail investors.
The proposed shift of power towards shareholders through increased voting rights also brings with it certain challenges that need to be addressed. One such challenge is the risk of decision-making errors, as well as the possibility of shifting agency costs from institutional shareholders to retail shareholders. To ensure effective decision-making, shareholders must be informed and rational in their approach. Another challenge is the approval of efficient agreements, as anti-commons shareholders may engage in opportunistic voting or prioritize short-term goals over long-term gains.
To tackle these challenges, it is important to promote standardised voting policies, encourage shareholder activism, and create influential proxy advisory institutions. It is also necessary to establish mechanisms to protect companies from anti-common shareholders who could potentially cause harm. Ultimately, the success of shareholders’ empowerment lies in their ability to ask the right questions and make virtuous decisions that balance short-term gains with long-term benefits and the welfare of all stakeholders.