 "U K Sinha")
The Securities and Exchange Board of India (Sebi) has tightened the regulations pertaining to profit-sharing or compensation agreements between private equity (PE) investors and the management of investee companies. The market regulator was of the view that such agreements could lead to unfair practices.
According to the new regulations, any such agreements in future will require a prior approval from shareholders. In case a PE has already inked such an agreement with the management, the company will need to disclose the same to shareholders and take their approval in the next general meeting.
In such voting, any “interested persons” involved in the transaction will abstain from voting.
According to legal experts, although such reward agreements are a common practice globally, they could raise corporate governance issues thereby impacting the shareholders.
“It is a welcome step though the accomplishment of this move would essentially depend on how Sebi defines interested persons, who ought to refrain from voting and providing approval to such transactions. This would require amendments to Regulation 26 of Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2015.” said Sumit Agrawal, partner, Suvan Law Advisors.
During the board meeting, Sebi also cleared a slew of proposals pertaining to angel funds, which are a sub-category of venture capitalists in alternate investment funds regulations. The relaxations include reduction in the minimum ticket size for angel funds in any venture capital undertaking to ~25 lakh from ~50 lakh. The upper limit for the number of angel investors in a scheme has also been increased to 200 from 40 earlier.
Sebi has brought the definition of start-ups for angel funds in line with Department of Industrial Policy & Promotion guidelines. “Accordingly, angel funds will be allowed to invest in start-ups incorporated within five years, which was earlier three years,” said Sebi in a media release.
These proposals were a part of the recommendations made by the Narayana Murthy-headed Alternative Investment Policy Advisory Committee, which presented its report to Sebi earlier this year.
“This will incentivise angel fund investment in start-ups and will greatly help start-up founders looking for small volume funding, without the constant interference of the investor à la venture fund investment,” said Nishit Dhruva, managing partner, MDP & Partners.
To improve the ease of doing business for overseas funds and to bring its regulations in sync with Reserve Bank of India rules, Sebi has also approved the proposal to allow foreign portfolio investors (FPIs) to invest in unlisted corporate debt securities and other debt instruments issued by a special purpose vehicles, which come under Sebi (Public Offer and Listing of Securitised Debt Instruments) Regulations.
“This move will go a long way in not only development of the corporate bonds/debentures segment but also in giving the necessary impetus to investment in securitised debt instruments. What is even more encouraging to see is that even private companies can now raise debt from FPIs without being subject to the exchange control borrowings framework,” said Suresh Swamy, partner, PwC.
