SEBI empowers shareholders to strengthen corporate governance

Empowering shareholders will ensure that blame for corporate scams will be shouldered by boards and also by the former

On February 21, market regulator Securities & Exchange Board of India (Sebi) proposed governance changes through a ‘Consultation Paper on Strengthening Corporate Governance’. It addresses issues regarding agreements binding listed entities, special rights granted to shareholders, management of assets of a listed entity outside the scheme of arrangement framework, and board permanency at listed entities.

Currently, India’s corporate governance regime comprises both mandatory and voluntary guidelines, put in place through the Companies Act 2013, the MCA guidelines, and industry-specific regulations. The Listing Obligations and Disclosure Requirements (LODR) Regulation is crucial for listed companies, and the consultation paper proposes to amend the LODR.

It seeks to confer additional rights to the shareholders of listed entities, while tightening the scrutiny on agreements binding listed entities. It empowers the shareholders by making them a party to the approval process of certain agreements previously cleared at the board level. It seeks to review special rights conferred upon certain shareholders, particularly promoters, prior to listing. This step ensures that shareholder rights are not available in perpetuity.

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SEBI desires to do away with the protection accorded to promoter-directors via Articles of Association as not liable to 'retirement by rotation', and without defined tenure. This issue surfaced as a concern in the Dish TV-Yes Bank issue, where the Founding Director continued in his position despite the shareholders voting against his re-appointment. Additionally, periodic shareholders' approval requirements for all categories of directors of all listed companies shall be made applicable with effect from April 1, 2024.

However, the proposals must be subjected to a caution that India’s corporate landscape is predominantly promoter-driven. Further, experience and deep acquaintance of promoter-directors concerning the operational efficiencies of the company’s management appear to be more important than rotation in a concentrated ownership pattern of companies. It is, thus, apposite to suggest promoter-directorship may be subjected to periodic shareholder approval at this stage only if existing empirical evidence supports that rotation of promoter-directors will increase performance.instead of the blanket application of periodic shareholder approval for all categories of directors.

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The proposed norms manifest SEBI’s idea of corporate control through shareholders. The empowerment signals an invitation to shareholders to join the process of virtuous decision-making. This will ensure that the social blame for corporate scams will not only be shouldered by the boards, but also by the shareholders.

The consultation paper also suggests disclosure of all agreements that impact the management and control of a listed entity. It mandates disclosure of all agreements between promoters and third parties to which the listed entity is not a party, an issue sensitised after the ICICI Bank-Videocon loan fraud case. However, agreements about the operation of the entity's business, i.e., supply agreements, purchase agreements, etc., shall be exempted.

Aimed at securing the interests of minority shareholders, the draft rules call for mandatory disclosure of objects and commercial rationale in case of lease, sale, or disposal outside the scheme of the arrangement. SEBI is calling for an overhaul of the corporate governance norms after massive-scale mismanagement and governance catastrophes have been underscored in several cases, such as the Satyam scandal, the Kingfisher Airlines case, the DHFL fraud case, the Nirav Modi scam, the Tatas-Cyrus Mistry clash, the IL&FS financial crisis, the Singh Brothers of Ranbaxy scandal, etc. The amendment suggested shall strengthen the framework of slump sales executed outside the merger and acquisition framework.

This consultation paper, if implemented, is a welcome step to enhancing the corporate governance framework by promoting shareholder democracy and increased transparency. The need for shareholder empowerment through additional disclosure seems to be mooted by SEBI due to the increased accessibility of cyberspace, which has immensely heightened shareholders' ability to interreact with themselves, and with the management. However, maturity in processing or analysing the available information is yet to reach a developed curve among retail investors.

This renewed shift of power is susceptible to challenges such as the risk of decision-making errors, shifting of agency costs by retail shareholders upon institutional shareholders, etc. The right to vote vests greater responsibility on shareholders to be informed, and to be rational. Challenges also exist in approving efficient agreements due to the problem of anti-commons who may abuse their power to engage in opportunistic voting or short-term goals. These challenges could be addressed through promotion of standardised voting policies, increased shareholder activism, influential proxy advisory institutions, and mechanisms to protect the companies from the destructive anti-common shareholders.

Nevertheless, the overall success of the proposed shareholders’ empowerment through the right of approval lies in the readiness to ask virtuous questions in decision-making given the governance complexities in large corporations and their willingness to compromise the short-term earnings in return for long-term gains or promotion of morale for stakeholders at large.

(Shakti Deb teaches at Indian Institute of Management, Tiruchirappalli, and Trisha Shreyashi is an advocate.)

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH)