Market regulator SEBI has proposed changes to governance norms for listed entities that give more rights to shareholders while increasing corporate disclosures on agreements binding them. Any director serving on the board of a listed firm more than once every five years would require shareholder approval beginning on April 1, 2024, according to a proposal by the SEBI.
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The capital markets regulator SEBI on Tuesday proposed that listed firms obtain shareholder approval at least once every five years for the nomination of directors to serve on their board of directors in an effort to end the practice of occupying permanent directorships in a company.
It was stated that not all directors acting on the boards of listed entities may be liable for retirement by rotation and that there may be certain directors appointed to a board of a listed organization without a specified tenure who are not.
SEBI remarks in Consultation Paper
In a consultation paper on reinforcing corporate structure at listed entities by empowering shareholders, SEBI suggested that “in the interest of corporate governance principles at firms listed, all directors designated to the board of a public company need to go through periodic shareholders’ approval process, thereby providing authenticity to the director to continue to serve on the board.”
The markets regulator stated that beginning on April 1, 2024, the listed entity must obtain input from stakeholders in the first general meeting that will take place after April 1, 2024, for any director sitting on the board of a public company without his or her appointment or re-appointment having been subject to approval during the previous five years, or as of April 1, 2019.
SEBI suggested rules regarding Special Rights
In addition to the question of board permanency, SEBI also suggested a number of rules regarding special rights granted to specific shareholders, the sale, disposal, or leasing of assets of a listed firm outside the “scheme of arrangement” framework, and contracts involving listed entities.
The regulator has seen that institutional investors are raising objections to the special rights granted to founders and other entities associated with a company more frequently in the so-called “new-age IT companies.”
These rights belong to the founders/entities forever, even if the shareholding is reduced over time.
According to SEBI, companies offer special rights to their pre-IPO investors and promoters in order to attract capital before they are listed. The shareholders’ agreements (SHAs) signed by the business and the pre-IPO investors/promoters contain these particular rights.
SEBI advocated that any special rights (existing or planned) granted to a shareholder of a listed entity be subject to shareholder approval once every five years from the date of grant of such special rights in order to address the problem of certain shareholders having special rights indefinitely.
Following a dispute between Yes Bank and Dish TV Ltd in July 2022, the regulator conducted a review. Jawahar Goel remained a director despite the shareholders, including Yes Bank, voting against his reappointment as chairman because the AoA passed three months before Dish TV launched in the market prevented him from leaving due to rotation.
