Securities markets regulator SEBI has mandated that promoters/ directors/ key managerial personnel (CEO/CFO) of companies who enter into compensation/ profit sharing agreements with third parties, such as private equity (PE) firms, can do so only with prior approval of the board and shareholders via ordinary resolution.

The move seeks to end malpractices related to off-the-record agreements benefiting a few, providing them private benefits in a public company, leaving others in the lurch — considered a corporate governance wrongdoing.

Tejesh Chitlangi, Partner IC Legal, said, “This will ensure that the shareholders get a chance to veto the arrangement if they find the performance incentive thresholds too onerous, which can only be achieved by adopting aggressive business plans that may end up negatively impacting the company. However, retrospective applicability on existing contractual arrangements may not be desirable, as in case of non-approval this may lead to termination of the earlier contracts which were otherwise validly entered into between the parties.”

SEBI has ordered that all such agreements entered into during the past three years from the date of notification be informed to the stock exchanges for public dissemination. All such agreements should be put up for shareholder approval, it added.

Interested persons? SEBI has further mandated that interested persons abstain from voting on the resolution.

“A lot would depend upon how SEBI defines “interested persons” who should refrain from voting and providing approval to such transactions,” said Sumit Agrawal, former lawyer for SEBI lawyer & founder, Suvan Law Advisors.

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