Sebi for curbs on compensation agreements with PE firms

Regulator seeks public comments on proposed norms by October 18

The Securities and Exchange Board of India (Sebi) has proposed curbs on compensation agreements between promoters of a listed entity and private equity (PE) funds.

In a discussion paper, the markets regulator proposed that certain arrangements between listed entities and PEs would need prior approval from shareholders.

"No employee, including key managerial personnel, director or promoter of a listed entity shall enter into any agreement with any individual shareholders or any other third party with regard to compensation or profit sharing unless prior approval has been obtained from the board (of directors), as well as shareholders by way of an ordinary resolution,” Sebi proposed in a paper titled ‘Corporate Governance Issues in Compensation Agreements’.

The proposals were approved by the Sebi board on September 23 (public comments have been invited till October 18).

“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. In case approval from shareholders is not received, all such agreements shall be discontinued," proposed Sebi.

It said there had been instances where PE funds had entered into compensation agreements with promoters of listed companies and made gains but these were not disclosed.

“Certain PE firms have entered into side agreements with top personnel and key managerial personnel by which such firms (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,” said Sebi.

Adding: “It is not unusual for PE funds to incentivise promoters of investee companies, based on performance of such companies. However, when such reward agreements are executed between the PE investor and the respective promoters of the listed entity, without any prior approval of the shareholders, it does give rise to concerns. It could potentially lead to unfair practices."

Sebi seeks public comments on the proposed norms by October 18.