Mumbai: The Securities and Exchange Board of India (Sebi) has asked PVR Ltd to explain a profit-sharing deal struck by its promoters with private equity investors that was not disclosed to its shareholders, said two people with direct knowledge of the matter, asking not to be identified.

On Thursday, multiplex firm PVR told investors that it received a show cause notice from the markets regulator alleging that its managing director (and promoter) Ajay Bijli and the company itself have violated listing and disclosure regulations. The show cause notice pointed to violation of two norms: one related to a code of conduct for all board members and senior management, and the second, disclosure of events and information which are material.

According to the two people cited in the first instance, the profit-sharing deal was ancillary to the allotment of equity to PE investors Multiples Asset Management and L Capital.

Called a incentive fee agreement, it gave the promoters of PVR 20% of the excess profits earned by Multiples, over and above a 30% rate of return generated on its investment in PVR.

Bijli has already received one payment from Multiples after the PE firm sold some of its stake in the company in 2014. It subsequently bought more stake in PVR.

L Capital exited its investment in PVR profitably last year. It isn’t known whether it paid the so-called incentive fee to Bijli and, if so, how much.

“The full disclosure of the deal was not made to shareholders. The shareholders were told about the preferential allotment to the private equity firms without disclosing the gains that the promoter would make in a personal capacity," said the first person.

The company may need to take a shareholder approval for the execution of the deal, these people said. In January 2013, PVR allotted Multiples and L Capital Eco Ltd, 6.244 million and 3.36 million shares respectively.

At that time, it had also allotted shares to Bijli and Sanjeev Kumar, co-promoter and deputy managing director of PVR.

According to the people cited in the first instance, the private equity investors signed agreements with Ajay Bijli to reward him privately if PVR shares gave superior returns and if Bijli continued as the managing director for a certain number of years.

“Sebi in the show cause notice has alleged that this side agreement was a materially price-sensitive information, and the company failed in making adequate disclosure to shareholders," said the second person. “The consequence of such a move could mean that PVR may face a monetary penalty and would need to disclose the terms of the PE agreement to all stakeholders and take their nod."

A spokesperson for PVR declined to comment. L Capital did not respond to an email.

“The show cause notice has been issued to the company (PVR). Multiples has no comments to make on this matter," said a spokesperson for the private equity firm.

While promoters in Indian firms have been known to strike such deals, PVR’s show-cause notice assumes importance in the wake of Sebi’s proposed amendments in the listing regulations.

The capital markets regulator wants to now prohibit the management and promoters from entering into a compensation and profit-sharing agreement without the shareholders’ approval. It also wants companies to inform shareholders about any such deals struck in the past three years and take their permission.

PVR promoters own 25.25% of the multiplex operator while Multiples held at least 9.63% at the end of September.

Proxy advisory firm, Shareholder Empowerment Services (SES) said that such agreements violate the shareholder rights.

“Such practice amounts to indirect remuneration being paid to promoter, managing director without knowledge and approval of shareholders and amounts to making mockery of law as well as shareholders’ rights and democracy," said J.N. Gupta, co-founder and managing director of SES. “We are not aware whether action is proposed by Sebi against PE investors as well. I am of the view that they are equally culpable. If they are allowed to go scot-free, justice will only be half-done."