[The following post is contributed by
Amitabh Robin Singh, who is a
corporate lawyer practising in Mumbai.
Amitabh Robin Singh, who is a
corporate lawyer practising in Mumbai.
For another perspective on the topic,
please see an earlier post on the Blog.]
please see an earlier post on the Blog.]
The Securities and Exchange Board of India (“SEBI“) has released a
discussion paper (“Paper“)
to regulate certain arrangements between private equity investors and the
promoters/top personnel of a listed investee company. These arrangements are
generally called promoter upside sharing arrangements and provide for the
private equity investor to share a part of the gains that it makes above a
certain threshold with the promoter in a proportion decided among the parties.
These agreements are generally based on the internal rate of return (commonly
known as IRR) that the private equity investor makes at the time of exit.
discussion paper (“Paper“)
to regulate certain arrangements between private equity investors and the
promoters/top personnel of a listed investee company. These arrangements are
generally called promoter upside sharing arrangements and provide for the
private equity investor to share a part of the gains that it makes above a
certain threshold with the promoter in a proportion decided among the parties.
These agreements are generally based on the internal rate of return (commonly
known as IRR) that the private equity investor makes at the time of exit.
For example, it can be agreed that if the private
equity investor gets an internal rate of return of more than 50% on its
investment, then an agreed proportion of the return which is above 50% will be
shared with the promoter as a reward for handling the day to day management of
the company in such a manner that the share price has risen enough for the
investor to enjoy such returns.
equity investor gets an internal rate of return of more than 50% on its
investment, then an agreed proportion of the return which is above 50% will be
shared with the promoter as a reward for handling the day to day management of
the company in such a manner that the share price has risen enough for the
investor to enjoy such returns.
A recent case which may have prompted SEBI to bring
this issue under the scanner was the exit of certain investors from PVR Limited
(“PVR“)[1],
which runs a chain of multiplex cinemas. The MD and CEO of PVR signed
“Incentive Fee Side Agreements” that were not disclosed to the
shareholders or the stock exchanges based on the logic that the payments which
may be made to the MD in the future will not be made from PVR’s books,
hence no disclosure was required. The MD was to receive 20% of the amount
received by the investors which was in excess of 30% returns on their
investment. Seeing that the relevant SEBI regulations do not allow promoters to
receive stock options, it was the opinion of one of the investors in PVR that
this arrangement was “in lieu of
ESOPs“.
this issue under the scanner was the exit of certain investors from PVR Limited
(“PVR“)[1],
which runs a chain of multiplex cinemas. The MD and CEO of PVR signed
“Incentive Fee Side Agreements” that were not disclosed to the
shareholders or the stock exchanges based on the logic that the payments which
may be made to the MD in the future will not be made from PVR’s books,
hence no disclosure was required. The MD was to receive 20% of the amount
received by the investors which was in excess of 30% returns on their
investment. Seeing that the relevant SEBI regulations do not allow promoters to
receive stock options, it was the opinion of one of the investors in PVR that
this arrangement was “in lieu of
ESOPs“.
Another interesting point on such arrangements is that
the total compensation of the promoters may exceed the limits prescribed in the
Companies Act, 2013 (“the Act“),
i.e., if the remuneration is more than 11% of the net profits of the company or
the limits specified in Schedule V of the Act depending on the profitability of
the company. However, the Act uses the language “remuneration payable by a public company“, and hence
such compensation is cleverly placed outside the scope of caps on remuneration.
the total compensation of the promoters may exceed the limits prescribed in the
Companies Act, 2013 (“the Act“),
i.e., if the remuneration is more than 11% of the net profits of the company or
the limits specified in Schedule V of the Act depending on the profitability of
the company. However, the Act uses the language “remuneration payable by a public company“, and hence
such compensation is cleverly placed outside the scope of caps on remuneration.
SEBI is concerned that these promoter upside sharing
arrangements, when executed without the approval of the shareholders of the
company, may lead to unfair practices and not be in the best interests of
investor protection. The promoter may give short term capital appreciation
precedence over long-term wholesome growth of the company in anticipation of
receiving substantial upside upon the exit of the investor. SEBI uses rather strongly
worded language in the Paper saying that “such agreements are not desirable and hence it is necessary
to regulate such practices.”
arrangements, when executed without the approval of the shareholders of the
company, may lead to unfair practices and not be in the best interests of
investor protection. The promoter may give short term capital appreciation
precedence over long-term wholesome growth of the company in anticipation of
receiving substantial upside upon the exit of the investor. SEBI uses rather strongly
worded language in the Paper saying that “such agreements are not desirable and hence it is necessary
to regulate such practices.”
SEBI goes on to ponder over two different views on the topic:
the first being the comparatively stern position that such arrangements should
be totally disallowed in listed companies, while the other being the more
benign view, which is that these arrangements should stand scrutiny before the
board of directors and shareholders of the listed company.
the first being the comparatively stern position that such arrangements should
be totally disallowed in listed companies, while the other being the more
benign view, which is that these arrangements should stand scrutiny before the
board of directors and shareholders of the listed company.
SEBI has proposed that Regulation 26 (which governs the
obligations of directors and senior management of listed companies) of the SEBI
(Listing Obligations and Disclosure Requirements), Regulations, 2015 be amended
to insert a new sub-regulation 6 which will state that no “employee”
of a listed company will be permitted to enter into any arrangement with any
“individual shareholder(s)” or any third party relating to profit
sharing or compensation without the sanction of the board and the shareholders
by way of an ordinary resolution. It may be noted that the broader term
“employee” is used here and an inclusive list is provided afterwards
mentioning key managerial personnel, promoter, etc. So if the recipient of the
compensation does not fall in the legal definition of promoter, key managerial
personnel or is not a director of the concerned company, he will still be well within
the ambit of the proposed provision.
obligations of directors and senior management of listed companies) of the SEBI
(Listing Obligations and Disclosure Requirements), Regulations, 2015 be amended
to insert a new sub-regulation 6 which will state that no “employee”
of a listed company will be permitted to enter into any arrangement with any
“individual shareholder(s)” or any third party relating to profit
sharing or compensation without the sanction of the board and the shareholders
by way of an ordinary resolution. It may be noted that the broader term
“employee” is used here and an inclusive list is provided afterwards
mentioning key managerial personnel, promoter, etc. So if the recipient of the
compensation does not fall in the legal definition of promoter, key managerial
personnel or is not a director of the concerned company, he will still be well within
the ambit of the proposed provision.
Interestingly, SEBI has thrown a spanner in the works, by inserting
a proviso to the effect that while such existing arrangements may continue, the
stock exchanges must be informed of them and shareholder approval by way of an
ordinary resolution will be required at the ensuing annual general meeting. If
such approval is not procured, then the arrangement will fall away.
a proviso to the effect that while such existing arrangements may continue, the
stock exchanges must be informed of them and shareholder approval by way of an
ordinary resolution will be required at the ensuing annual general meeting. If
such approval is not procured, then the arrangement will fall away.
This provision may alarm promoters of listed companies who
have entered into such arrangements with private equity investors, seeing that
they will fear their upside sharing falling away due to no fault of their own,
even if they do help the company reach the desired position.
have entered into such arrangements with private equity investors, seeing that
they will fear their upside sharing falling away due to no fault of their own,
even if they do help the company reach the desired position.
However, the Paper seems to encapsulate a step in the
right direction for improving investor protection in the Indian market.
right direction for improving investor protection in the Indian market.
– Amitabh Robin Singh
[1] Facts of the matter have been sourced from
various news websites:
various news websites:
http://www.asianage.com/business/sebi-lens-illicit-pe-deals-promoters-545;
http://timesofindia.indiatimes.com/business/india-business/PEs-reward-PVRs-Bijli-for-stock-returns/articleshow/49603297.cms;
http://www.dnaindia.com/money/report-secret-pact-helps-pvr-s-bijli-earn-profits-2142866