Practice of permanent board seats at listed companies likely to end

Sebi also proposes stricter norms for special rights

The Securities and Exchange Board of India (Sebi) has proposed to put a stop to the practice of certain directors occupying permanent board seats at listed companies. The regulator has suggested that the directorship of any individual serving on the board should be subject to periodic approval from shareholders, at least once in five years.

In a discussion paper issued on Tuesday, Sebi said a few promoters enjoyed permanency on the board, giving them an undue advantage, prejudicial to the interests of public shareholders. The issue had come into focus last year when a tussle broke out between Dish TV’s erstwhile promoters and YES Bank over the not-liable-to-retire tag enjoyed by Jawahar Goel.
 

There are two ways by which an individual can occupy a permanent seat on a board — by having a clause inserted in the Articles of Association (AoA) or by getting appointed on the board as a director not liable to ‘retire by rotation’ and without any defined tenure. 
 

Sebi proposed in the paper that if there was any director serving on the board without obtaining shareholders’ approval as on March 31, 2024, during the previous five-year period, such a listed entity would have to get the nod in the first general meeting to be held after April 1, 2024. Subsequently, companies will be required to obtain shareholders’ nod at least every five years for all director positions.
 

It couldn’t be immediately ascertained how many directors at listed companies would be impacted by this proposal.
 

In the same discussion paper, Sebi made a few other important recommendations with regard to binding agreements, special rights given to certain shareholders, and slump sale by listed companies without obtaining shareholders’ approval.

Typically, to attract investments in a company prior to its listing, special rights are offered by the firm to its pre-IPO investors and promoters. These special rights are included in the shareholder’s agreements executed between the company and pre-IPO investors.

In order to address the issue of certain shareholders enjoying special rights perpetually, Sebi proposed that any special right (existing/proposed) granted to a shareholder of a listed entity shall be subject to shareholders’ approval once in every five years from the date of grant of such special rights.

Similarly, on the issue of binding agreements, the regulator said any agreement that impacted the management or control or imposed any restriction or created any liability, should be adequately disclosed by the listed entity. Sebi, however, said any agreement entered into by a listed entity for the business operations can be excluded from the scope of such disclosures.

The regulator also proposed safeguards to prevent slump sales executed outside the scheme of arrangement framework to protect the interests of minority shareholders.