Enhancing disclosures

Sebi's directive on family agreements will improve transparency

In a circular issued last week, the Securities and Exchange Board of India (Sebi) clarified certain amendments to the Listing Obligations and Disclosure Requirements Regulations (LODR) pertaining to the disclosure of material events. This extends the definition of material events listed companies must disclose, along with a timeline for disclosure. A listed entity should also disclose the number of agreements in existence as of the date of notification, including a link to a webpage where the details of such agreements are made available. This clarification follows the amendments to the LODR in March, when the regulator broadly extended the number and types of disclosures. One of the key clauses pertains to family agreements. This could impact many listed family-promoted companies.

The rule specifies (among other things) that family-settlement agreements that may impact the management and control of a listed entity would have to be disclosed within 12 hours of such agreements being made. Or if such agreements already exist prior to July 15, when the rule comes into effect, these agreements must be disclosed with retrospective effect. These disclosures must be made even if the listed company itself is not party to the specific agreement. Such a mandate for the disclosure of family agreements would increase transparency. The disclosure format for shareholder agreements should include the details of the parties involved, the date of entering the agreement, the terms of the arrangement, the purpose of entering into the agreement, the impact on the management of a listed company or creation of a liability on it, and any subsequent changes to the pacts. The markets regulator stated that disclosures should also cover reasons for amending or revoking the pacts.

Given the breadth of the details required, this could cover almost any arrangement among members of promoter families. There would remain some degree of subjectivity in deciding if the management or control of a listed company would be affected by a given agreement, though the rule specifies that even “indirect impact” must be disclosed. Also, according to legal opinion, this rule may exclude arrangements concerning stakes held by families (or by high-net worth individuals) if the owner or owners of such stakes are not part of the management. Corporate-law experts point out that promoter families frequently have disputes among family members, which lead to sweeping changes in management structures and ownership. For example, the Ambani brothers, Mukesh and Anil, made an arrangement to split control of the Reliance group companies after the death of their father, Dhirubhai Ambani. Many other families have seen arrangements that have led to changes in management structures and control of the relevant listed companies.

The new rule would affect ownership since promoters have been known to lose control of a company as and when a share pledge is exercised. Apart from that, there may be an impact on control, or upon the right to appoint board members, or appoint a chief executive officer. There could also be family arrangements that affect a company’s operations such as a family member exiting the business under a “non-compete clause”. The intention behind this clarification is to benefit other shareholders in such circumstances. If there is a family agreement, the early disclosure will improve transparency by giving other shareholders a chance to review their holdings and valuations of the impacted businesses.