In defence of small shareholders

Sebi to fix promoters' side deals with PE investors

The Securities and Exchange Board of India's (Sebi) decision to come out with regulations on corporate governance issues in compensation agreements can go a long way in protecting investor interest and putting a stop to unfair practices. The market watchdog found cases where private equity funds with stakes in listed companies were compensating promoters and key executives based on the company's performance. While this practice may be widespread in start-ups as a way to reward merit and success, Sebi's contention is that shareholders must be kept in the know. In one reported case, the promoter-CEO of a listed company was paid 20 per cent of excess profits over a particular hurdle rate that the private equity investor made. Sebi's consultation paper seeks public comments on whether such deals should need disclosure and prior approval of shareholders, and whether existing agreements should be informed to the stock exchanges.

Even in the past, Sebi has taken a strong position on non-compete fees to promoters whose businesses are being acquired. The regulator had a tolerance of 25 per cent over the deal price on non-compete fees but needed to be convinced that such a payment was necessary. In cases such as Tata Tea's acquisition of Mount Everest Mineral Water in 2007 or Heidelberg Cement's purchase of Mysore Cements in 2006, Sebi had asked the acquirer to pay non-compete fees to all the shareholders and not restrict them to promoters of the target companies. However, the Securities Appellate Tribunal had set aside Sebi's ruling in both cases and allowed the non-compete fee to be paid. In 2010, the Takeover Regulations Advisory Committee, instituted by Sebi, recommended that all shareholders should receive the same price in keeping with the spirit of equal treatment for all shareholders. Later Vedanta, which was supposed to pay a non-compete fee to Cairn Energy UK to acquire Cairn India, cancelled it. In 2011, Sebi came out with the rule that if a non-compete fee was being paid to promoters, the same should be paid to all shareholders, thereby rendering the non-compete fee to the promoters meaningless.

Sebi Chairman U K Sinha said last week that the regulator was not happy with managements receiving something over and above what other shareholders did. However, in case of mergers where the takeover code does not apply and there is no tender offer, the decision of whether to pay non-compete fees devolves upon the shareholders, who decide to vote for or against the proposal. One such deal is in the eye of the storm. In the first insurance sector merger of HDFC Life Insurance and Max Life Insurance, the merged entity will pay a non-compete fee of Rs 850 crore to Max promoter Analjit Singh and his family. In the way the deal is structured, minority shareholders of Max Financial will end up paying promoters to not set up a similar business that they participated in building together. The results of voting on this issue, which will be out on Tuesday, should be interesting.