On Tuesday, capital markets watchdog Sebi proposed a regulatory framework to address the permanent special rights of certain shareholders to enhance the corporate governance of listed entities.

In addition, the regulator also proposed measures to address issues related to the agreement binding of listed entities and the “board permanency” of listed entities. In addition, it is considering handling the sale, disposal or lease of assets of listed entities outside the framework of a scheme of arrangement.

The Securities and Exchange Board of India (Sebi) has sought public comments on the proposal until March 7. To address the issue of certain shareholders having special rights in perpetuity, Sebi proposed that any special rights granted to shareholders of listed entities should be subject to shareholder approval every five years from the date such special rights are granted.

In addition, the existing special rights of shareholders shall be renewed within five years from the date of the notification of amendments to the LODR regulations. Against this backdrop, shareholders of public bodies have increasingly expressed their concerns about the special rights conferred on promoters, founders and certain bodies corporate of these companies.

Sebi noted that the shareholder agreements are drafted so that these special rights (nomination rights) remain available even after substantially diluting their holdings in these entities. This allows shareholders to enjoy this special right perpetually, contrary to the rights and shareholding ratio principle.

In addition, Sebi suggested that all directors appointed to the boards of listed entities must pass through the shareholder approval process regularly, providing legitimacy for directors to continue serving on the board. This will be done intentionally by citing the company AoA or those appointed as directors who will not “retire by rotation” and have no definite term of office, Sebi said.

From March 2024, if a director has served on the board of directors of a listed company without the approval of the general meeting of shareholders within the last five years, the listed company shall obtain the approval of the general meeting of shareholders at the first general meeting before becoming a director of the listed company. After April 1, 2024, to continue serving on the board of the listed entity.

From April 1, 2024, listed entities shall ensure that all directorships serving on the board of directors or appointing directors are submitted to the general meeting of shareholders for consideration at least once every five years. Sebi proposed that an agreement whose purpose and effect is to affect management or control, impose any restriction, or create any liability must be disclosed to the stock exchange.

However, agreements entered into by listed entities to operate the company’s business – supply agreements, purchase agreements, etc. – have been proposed to be excluded from disclosure. In addition, the regulator also proposed measures to strengthen the framework for low-price sales executed outside the framework of schemes of arrangement to safeguard the interests of minority shareholders.

Sebi has proposed introducing provisions in the disclosure rules for the sale, disposal or lease of all or substantially all of a listed company’s business. In addition, it recommends mandatory disclosure to shareholders of the purpose and commercial rationale for such sales, disposals or leases.