India: Compensation Agreements Under SEBI Scanner

Last Updated: 22 December 2016
Article by Seema Jhingan, Neha Yadav and Saniya Kothari

1. SEBI's view on Compensation Agreements.

1.1 Earlier in its meeting of September 23, 2016, the Securities and Exchange Board of India ("SEBI"), had expressed its concerns regarding instances of private equity ("PE") funds entering into compensation agreements with promoters, directors and key managerial personnel of listed investee companies, based on performance of such companies, without approval of the shareholders. It, thereafter, issued a consultation paper on October 4, 2016 on the corporate governance issues in such compensation agreements in case of listed companies, for public comments ("Consultative Paper").

1.2 The Consultative Paper highlighted that these compensation agreements envisages the PE funds sharing a certain portion of the gains above a certain threshold limit made by them at the time of divestment of their shares of the listed company, subject to the company achieving certain performance targets and continued employment of such personnel with the company for a certain period. As such arrangements were typically executed without prior approval of the shareholders, SEBI was of the view that there is a need to regulate such arrangements, as it may lead to potential unfair practices.

1.3 Based on the Consultative Paper and the comments received thereon, SEBI, in line with its intent to promote and raise the standard of corporate governance, vide its meeting held on November 23, 2016, approved certain amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("Listing Regulations") to bring compensation agreements under its purview.

An overview of this proposed amendments and its implications is dealt with in the following section.

2. Amendment to the Listing Regulations.

2.1. To address the corporate governance issues, highlighted by SEBI, as being inherent in such compensation/profit sharing arrangements, SEBI has approved the following amendments to Regulation 26 of Listing Regulations (dealing with the obligations of directors and senior management):

  1. "No employee including key managerial personnel, director or promoter of a listed entity shall enter into any agreement for himself or on behalf of any other person, with any shareholder or any other third party with regard to compensation or profit sharing unless prior approval has been obtained from the Board as well as public shareholders."

    Ordinarily, parties would enter into compensation agreements without seeking approval of the shareholders. However, by way of this amendment, execution of agreements pertaining to any kind of compensation/profit sharing between the employee of a listed company (including key managerial personnel/director/promoter), with any shareholder/third party (with may include a potential investor or a PE fund) shall require prior approval of not just the shareholders of the company but also SEBI. The scope of this amendment is also wide enough to cover compensation/profit sharing arrangements of all employees (and not just key employees) with any shareholder or third party (and not just the potential investor/PE fund).
  2. "All such agreements entered during the past three years from the date of notification shall be informed to the stock exchanges for public dissemination including those which may not be currently valid."

    This amendment requires disclosure of all compensation agreements/profit sharing arrangements entered in the past 3 years, whether or not they are valid to the stock exchanges for public dissemination. It is obvious that SEBI intends to impose the transparency obligation from retrospective effect even though approval from SEBI is not required for such past arrangements.
  3. "Existing agreements entered into prior to the date of notification and which may continue to be valid beyond such date shall be informed to the stock exchanges and approval shall be obtained from public shareholders by way of an ordinary resolution in the forthcoming general meeting. The term 'public' shall carry the same meaning as defined under Rule 2 of Securities Contracts (Regulation) Rules, 1957."

    Appropriate disclosures are to be made and approval of the public shareholders is to be obtained for the existing compensation agreements, which may have been entered into the past but continue to be valid after the date of notification. While SEBI, in its November meeting hasn't clarified what happens if such shareholders' approval does not come through, based on the language of the proposed amendment in Consultative Paper, it is likely that the agreements, for which the shareholders' approval is not obtained, would be required to be discontinued or would become enforceable.
  4. "Interested persons involved in the transactions shall abstain from voting on the said resolution."

    Every person who is interested in the transaction (such as the shareholders/directors who are party to these arrangements) are barred from voting on the aforesaid resolution.

It is also interesting to note that SEBI on November 22, 2016 (i.e. only one day prior to its meeting of November 23, 2016 where it approved the aforesaid amendments), issued a show cause notice to PVR Limited in relation to the alleged violations committed by Mr. Ajay Bijli, Chairman and Managing Director of the company, of the erstwhile listing agreement and the Listing Regulations vis-à-vis an incentive fee arrangement entered between him and the PE investors.

3. Implications.

3.1. The compensation agreements typically incentivize the promoters/key employees/directors of the company, to achieve certain performance targets and milestones vis-à-vis the company, in exchange for a share in the gains made by the investors at the time of their exit. These arrangements are widely used by investors to not only incentivize the promoters/key employees/directors but to accelerate the growth of the company and its consequent valuation to benefit the investors and other shareholders at large.

3.2. But, from SEBI's view point, these arrangements are a breeding ground for corporate governance issues and unfair trade practices. For instance, these agreements may result in promoters/key management undertaking inappropriate/prejudicial practices to enhance company's performance and valuation to satisfy the agreed performance criteria at the cost of long term sustainability and growth of the company. SEBI believes that regulation of such transactions is important to bring in more transparency and accountability.

3.3. That said, the devil is in the details, and although SEBI has approved the general scope and extent of these amendments in its board meeting, certain issues still remain unsettled. For instance, it is unclear as to the criteria on the basis of which SEBI would approve/reject such compensation agreements, and whether such approvals, even if forthcoming, would be conditional in nature or not. In absence of such clarity, the requirement of obtaining SEBI's prior approval in a private party transaction seems particularly onerous. If the objective is to bring in transparency and accountability in such arrangements, then the requirement of due disclosures to the stock exchange and obtaining prior approval of shareholders (whose value in the company is likely to be impacted consequent to such arrangements) should have been sufficient.

3.4. As these amendments go beyond disclosures, and require approvals being obtained from shareholders as well as SEBI, the practical difficulties faced while executing these compensation agreements in future may very well act as a dampener to these transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions