The Securities and Exchange Board of India (SEBI) is looking at options to limit the use of Articles of Association (AoA) of a company by some shareholders to get special power over others, a source has told Moneycontrol.
The regulator views these special powers as hurdles in maintaining corporate governance in a company.
The move comes in the wake of the recent spat at InterGlobe Aviation, the parent company of IndiGo, in which one co-founder accused another of misusing “unusual powers” to take decisions that fail to meet corporate governance standards.
According to the source, SEBI may instruct listing companies to publicly disclose any special clauses they may have embedded in the company’s Articles of Association (AoA) as part of the Listing and Disclosure Requirement (LODR) obligations.
Another source added that the Ministry of Corporate Affairs (MCA) may also consider amending the Companies Act, 2013, banning such arrangements.
In the IndiGo case, the AoA gives rights to InterGlobe Enterprises (IGE) controlled by Rahul Bhatia, to appoint three non-independent directors, one among which shall not be liable to retire by rotation. IGE also has the right to appoint the Chairman of the board, Managing Director, Chief Executive Officer and President of the company.
Recent corporate history suggests IndiGo is not a solitary case.
Max Financial, Jet Airways, Yes Bank and United Breweries are also cases that have come to light over the past few years where the AoA vested special powers in a particular shareholder.
“Special powers to shareholders deviate from motto that all shareholders should enjoy the same power and have equal rights,” said a source close to the regulator. “This has become a concern."
Last year, Max Financial Services had sent a notice to shareholders a proposal to appoint Analjit Singh as a director “not liable to retire by rotation”, effectively making him the chairman for life. Shareholders approved the proposal.
In the case of United Breweries, the AoA had appointed Vijay Mallya as UBL chairman for life, unless he decided to voluntarily step down. The clause created troubles for UBL promoter Heineken after banks declared Mallya a wilful defaulter, a move that debars an individual from sitting on any board.
While the Yes Bank issue arose after Rana Kapoor exercised special rights vested in him to deny Madhu Kapur, wife of his late partner Ashok Kapur, a board seat.
The regulator and the ministry should come out with regulation to curb special resolutions, said Amit Tandon, Co-founder and MD of IIAS, adding that many such proposals impinge on shareholder rights. "At one level, it is similar to issuing a DVR without calling it such," he said.
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