Sebi panel for more curbs on royalty payouts, information sharing

The corporate governance panel of the Securities and Exchange Board of India (Sebi) has recommended more checks and balances on royalty and brand payments, related-party transactions and sharing of information between management and entities not part of the board.

Among the key recommendations by the committee is one on the aspect of exchange of price-sensitive information between companies and a promoter no longer a part of the board or management.

The committee said a company could exchange unpublished price sensitive information (UPSI) with its promoters or persons only after the entity enters in an agreement of information-sharing with the designated person. These agreements would last at least one year and the company would reserve the right to terminate them.

According to the current norms, such information can be shared only between the board members. The information can be shared with any other person only on a “need-to-know” basis. But, several promoters are often not a part of the company’s boards but their opinion could be valuable for the company.

The move comes after the corporate battle between Ratan Tata and Cyrus Mistry, where the latter had alleged that the boards of Tata companies were sharing UPSI with Ratan Tata, who was no longer a part of the board of these companies.

“While it is recognized that the status of a promoter is akin to a perpetual insider requiring access to information on a regular basis and the role of the nominee director is to protect the interests of the nominating shareholder (subject to the former’s fiduciary duty), the information flow to such promoters and significant shareholders occurs in the ‘shadows’ in the absence of a green channel legitimising such information flow,” the panel said.

“The committee members proposed that the regulatory framework should be amended to provide an enabling transparent framework regulating the information rights of certain promoters and significant shareholders to reduce subjectivity and provide clarity for ease of business,” the 25-member panel, headed by Kotak Mahindra Bank Vice-Chairman and Managing Director Uday Kotak, said in its report.

The panel also recommended that if a company wants to pay any promoter-director a remuneration of more than Rs 5 crore, or more than 2.5% of the net profit, the move will need an approval from shareholders through a special resolution. Although there is a ceiling on the remuneration payable to directors under the Companies Act, there are no provisions for executive promoter-directors.

Among other prominent changes suggested by the committee are relaxed norms for promoter reclassification. Although Sebi brought in a framework for reclassification of promoters a few years ago, there are hardly any takers, given the stringent rules. Until now, a promoter who is not involved in the day-to-day activities of the company, could reclassify himself as a shareholder if he doesn’t own more than one% stake in the company. The committee has recommended increasing the threshold to 10%. Such a move will now require a nod from the company’s board as well as shareholders.

The committee also recommended that payments made by listed entities with respect to brand usage/royalty amounting to more than 5% of the consolidated turnover of the listed entity may require prior approval from public shareholders.

The committee has also recommended tightening of related-party transaction (RPT) disclosures. It has suggested that the companies should disclose their RPTs once every six months and violations be heavily fined.