In the wake of increased scrutiny of promoters signing side-deals to raise more debt from banks and mutual funds, the Securities and Exchange Board of India (Sebi) on Thursday widened the definition of “encumbrance" to make it more inclusive.
The definition, when notified, will include any restrictions on free and marketable shares of promoters which affect tradeability of shares. It will also include lien, negative lien, pledge and non-disposable undertakings (NDU).
Under the current takeover code, “encumbrance" includes a pledge of shares, lien or any such transaction.
“Even today the definition is wide enough but there were certain structures that were escaping scrutiny such as NDU. Now it is being more inclusive to cover all structures," said Amarjeet Singh, whole-time member, Sebi, after the market regulator’s board meeting.
Promoters would need to disclose reasons if 20% of their share capital is pledged or 50% of their shareholding in the company.
“To escape the disclosure requirements under present provisions, corporates use many types of complex forms of encumbrances. Widening the scope of encumbrance by including negative lien and NDUs etc would help in tightening norms for disclosure by promoters and will further improve the transparency," said Pavan Kumar Vijay, founder of Corporate Professionals, a law firm.
Sebi also tweaked its earlier proposal of capping royalty at 2% to 5% due to a push-back from the industry. The regulator had earlier proposed that any royalty payment above 2% would need a shareholder nod.
The Uday Kotak committee on corporate governance had originally recommended that royalties above 5% should need approval from shareholders.
Even though royalty payments were related-party transactions, they escaped shareholder approval since these did not exceed 10% of revenue or net worth and companies maintained that royalty payments were in the ordinary course of business and on arm’s length terms.
“We had received representation from the industry that it should be retained at 5%. We have agreed to the representation," Sebi chairman Ajay Tyagi said at a press meet.
In 2017-18, 27 multinational companies (MNCs) paid an aggregate ₹6,737 crore in royalties, more than half of which was accounted for by Maruti Suzuki India Ltd at ₹3,818 crore, or 25.8% of profits before tax, proxy advisory firm Institutional Investor Advisory Services India Ltd (IiAS) said in a report dated 27 March.
These royalty payments account for 16% of these 27 MNCs’ pre-tax pre-royalty profits and almost 27% of their aggregate ₹25,040 crore profit after tax.
Another major change is the reintroduction of differential voting rights for new age or technology companies to protect them from a hostile takeover.
There will two categories of shares—superior voting rights shares for promoters and founders and normal shares which will be issued to other shareholders.
Superior shares will have voting rights in the range of 2:1 to 10:1 as compared to normal shares. These shares will give promoters and founders superior rights in the appointment and removal of independent directors and auditors, for transferring control and related party transactions.