This led to concerns from public institutional shareholders and proxy advisers voicing concern against such perpetuity of special rights and permanency of board seats in listed entities, without the limitations of time or fall-away thresholds. Perpetual special rights were thus an issue between public institutional investors and promoter groups.

To address these concerns, SEBI now requires shareholder approval, on five yearly basis, of all existing and proposed special rights granted to a shareholder of a listed company. Under the LODR amendment, such special rights must be approved by the shareholders in a general meeting passing a special resolution once every five years starting from the date of the grant.

Regarding directors in perpetuity, the LODR amendment stipulates that from 1 April 2024, the continuation of non-executive and non-independent directors on the board of a listed entity must be subject to approval of the shareholders in a general meeting at least once every five years from the date of the appointment or reappointment. Every director on the board of a listed company on 31 March 2024, without the approval by the shareholders in the last five years or more, will now have to obtain shareholder approval at the first general meeting held after that date. Certain categories of directors, including independent directors, whole-time directors, directors appointed by courts or tribunals and nominees of the government or of a financial sector regulator are exempt.

In another move by SEBI that boosts shareholder empowerment, any sale, lease, or disposal of the whole or substantially the whole of the undertaking, as defined in the Companies Act, 2013, outside a court-sanctioned scheme of arrangement, will now be subject to a “majority of the minority” approval. In effect, the public shareholders will have the final say in such decisions. Any sale or disposal of the undertaking has to be approved by a special resolution which can only be acted upon if the votes cast by the majority of the public shareholders exceed the votes cast by public shareholders against the resolution. The object and commercial rationale for such disposal and the proposed use of the proceeds must be included in the explanatory statement attached to the notice of the shareholders’ meeting. This gives minority shareholders an effective voice in disposals following a private arrangement and aligns the process with the way undertakings are disposed of under court-sanctioned schemes.

To safeguard the interests of lenders and debenture holders, SEBI has confirmed that these requirements for approval of directors and special rights will not be applicable to financial institutions registered or regulated by the Reserve Bank of India under a lending arrangement in the normal course of business. Neither will they affect debenture trustees registered with SEBI in connection with debentures issued under a subscription agreement. The “majority of the minority” approval will also not apply to the disposal of an undertaking triggered by a covenant in a lending or debenture subscription agreement executed by such financial institution or debenture trustee.

The LODR amendment appears to be a step in the right direction towards SEBI’s stated aim of strengthening corporate governance and protecting minority shareholder interests.

This article was originally published in India Business Law Journal on 28 June 2023 Co-written by: Abhishek Guha, Partner; Amrita Ghosh, Associate. Click here for original article

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