SEBI issues Consultative Paper on Corporate Governance Issues in Compensation Agreements

SEBI has noticed that certain Private Equity (PE) firms have entered into side agreements with top personnel and key managerial personnel(KMPs) of a listed entity by which such PE firms ( who were allotted shares on a preferential basis) would share a certain portion of the gains above a certain threshold limit made by them at the time of selling the shares and also subject to the conditions that the company achieves certain performance criteria and the employee continues with the company for a certain period. 

It is felt that such agreements are not desirable and hence it is necessary to regulate such practices. One view is that there is no place at all for such side agreements in case of listed companies. Another view is that the focus may be on the principle of disclosure and transparency in governance of listed entities. Therefore, before key managerial personnel, directors and promoters of listed entities enter into such reward agreements, it would be mandated that such agreements undergo thorough scrutiny of the boards and shareholders who may vote on the resolution approving such agreements.

Keeping in view of the same the consultation paper proposes to seek public comments on the possible amendments to Listing Regulations, as detailed below:

A new sub-regulation (6) may be added to Regulation 26 (which pertains to obligations with respect to directors and senior management) to provide on the following lines:

 "No employee, including key managerial personnel, director or promoter of a listed entity shall enter into any agreement with any individual shareholder(s) or any other third party with regard to compensation or profit sharing unless prior approval has been obtained from the Board as well as shareholders by way of an ordinary resolution". 

"Provided that all such existing agreements entered into prior to the date of notification and which may continue beyond such date shall be informed to the stock exchanges for public dissemination and approval obtained from shareholders by way of an ordinary resolution in the forthcoming general meeting. Provided further that in case approval from shareholders is not received, all such agreements shall be discontinued "

Public comments are invited for the same.