<b>Debate:</b> Regulation of reward agreements by Sebi

Such pacts don’t impose duties or liabilities on listed firms
 

Akila Agrawal

Reward agreements are common in several countries. They are granted by private equity (PE) investors to incentivise key managerial persons to ensure their retention and create shareholder value. It is surprising that Sebi is of the view that such agreements pose a corporate governance issue.

The agreement is a private one and the listed company is not a party to it. There is no conflict of interest, as the interests of the parties to the agreement are aligned with the company and its shareholders. If a director has a pecuniary relationship with a shareholder, who is not a promoter of the company, it neither triggers any conflict of interest nor falls under ‘related-party’ arrangements, under applicable laws. There is, therefore, no basis for Sebi to mandate board and shareholder consent for an agreement that does not in any manner impose duties or liabilities on the listed company.

The background to the consultative paper states that certain PE investors, who were allotted shares on a preferential basis, have entered into ‘side’ agreements with managerial personnel in the form of reward agreements. If the mischief that Sebi seeks to remedy is non-disclosure of such ‘side’ agreements at the time of preferential allotment, then the proposed changes should be included in the Sebi Issue of Capital and Disclosure Requirements guidelines, where the explanatory statement to the preferential allotment should disclose any other arrangements that the allottee may have with the managerial personnel of the company, in the context of the allotment. The proposed changes could be limited to this aspect of reward agreements.

Lastly, the proposed changes to the Listing Agreement are wide and ambiguous. Employees of a listed company may share profits / be in partnership with or be compensated by, ‘any individual shareholder’ or ‘any third party’, in various situations which may have nothing to do with reward agreements as contextualised by the consultative paper. A wide amendment to the Listing Regulations in the manner proposed by the paper will lead to absurd consequences.

The writer is partner, Shardul Amarchand Mangaldas. Views expressed are personal

Insist on disclosures, without board approvals
 

Ajay G Prasad

No evidence has come to light to substantiate the view that such agreements between a private equity investor on the one hand, and promoters or key management of a listed company on the other will lead to ‘unfair practices’. Calling them ‘not desirable’ may be unnecessarily prescriptive. In fact, it is perfectly possible to argue that such agreements motivate such personnel to undertake additional efforts to increase the value of the company. To argue otherwise, and state that they may contribute to such persons taking a short-sighted approach is over-simplifying the matter. If that were to be the case, such arguments may be levelled almost all compensation agreements of any kind.

The Companies Act, 2013 also specifies that a director should act in good faith, exercise his duties with reasonable care, not involve in situations which conflict with the interests of the company, etc. These would also go a long way in ensuring that directors are acting responsibly.

To put things in context, an investor, exercising his commercial discretion, has decided to share a certain upside that he earns through the company, which he believes could be attributable to the efforts of certain persons within the company. Since the company itself is not involved, can it be argued that this rule amounts to a case of over-regulation? The Companies Act, 2013 does not concern itself with such arrangements.

Perhaps, a more balanced approach could be to insist on disclosures of such agreements only (without the need for obtaining board/shareholder approvals). This should satisfy the disclosure and transparency tests alluded to by Sebi.

The writer is senior associate, Kochhar & Co. Views expressed are personal