Sebi floats paper on special rights for pre-IPO investors

To attract investments to an IPO-bound entity, special rights are offered by companies to its pre-IPO investors and promoters. This usually is a part of the shareholders agreement between the company and the pre-IPO investors.

The regulator has stated that in order to address the issue of certain shareholders enjoying special rights perpetually, it is proposed that shareholders enjoying special rights in listed entities should be subject to shareholders approval once in every five years.

Sebi’s consultation paper released Tuesday proposes strengthening corporate governance at listed entities by empowering shareholders

The paper highlights the permanency enjoyed by the promoters on boards of listed entities and seeks public comments by March 7.

To address the issue the market regulator has proposed that the directorship of any individual serving on the board should be subject to periodic shareholders’ approval at least once in five years.

The proposal comes in the wake of certain media reports highlighting that a few promoters enjoy permanency on company boards, giving them an undue advantage, prejudicial to the interest of public shareholders.

The promoter-directors continue on the board even after substantial dilution of their stake and after ceding the control of the company.

Currently, there are two ways by which an individual can occupy a permanent seat on the board- one being the insertion of a clause in the Articles of Association (AOA) or by getting appointed on the board as a director not liable to ‘retirement by rotation’ and without any defined tenure.

According to the paper, as on March 31 , if there is any director serving on the board of a listed entity without appointment or re-appointmentbeing subject to shareholders approval during last five years, then the listed entity shall take shareholders approval in the first general meeting to be held after1 April, for their continuation in the listed entity.