The Securities and Exchange Board of India (SEBI) has been keen to address corporate governance issues arising out of private compensation and profit sharing arrangements offered to promoters or key managerial personnel (KMP) of listed companies following profitable exits by investors (Upside Sharing Agreements).

In this context, after seeking public comments, on 23 November 2016, the SEBI approved an amendment to Regulation 26 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (Listing Regulations), by the insertion of Regulation 26(6). This amendment was recently notified on 4 January 2017.


  • New Upside Sharing Agreements: New Upside Sharing Agreements between an employee, including a KMP or director or promoter, and a shareholder or third party would require prior approval from the board of directors of the concerned listed company (Board) and shareholders of the listed company through an ordinary resolution.
  • Existing Upside Sharing Agreements: To remain valid and enforceable, Upside Sharing Agreements existing as on 4 January 2017 are required to be approved at the next meeting of the Board and, thereafter, by the public shareholders of the listed company (see below for discussion on the concept of public shareholders).
  • Disclosure of existing Upside Sharing Agreements: Existing Upside Sharing Agreements executed in the past 3 years (prior to 4 January 2017) are required to be disclosed to the stock exchanges for public dissemination.
  • Only public shareholders eligible to vote: Only public shareholders can vote on the resolution for approving an Upside Sharing Agreement when it is tabled for approval at the shareholders meeting. Public shareholders would exclude promoters and entities and individuals, in the promoter group.
  • Interested persons' ineligible to vote: In addition to limitation of voting only by public shareholders, interested persons are also required to abstain from such voting. Interested persons will mean any person holding voting rights in the company who is, directly or indirectly, interested in the Upside Sharing Agreement.

Khaitan Comment

It is unfortunate that Indian regulators have, yet again, notified a law with retrospective effect.

Without delving into the issue of conflict of interest (which may not be the case in all situations), this amendment takes away significant flexibility that was available to the investor community to construct effective compensation structures. As a concluding thought, while it is reasonable and consistent with the principles of corporate governance that interested persons abstain from voting on matters in which they are interested, carving out promoters entirely from voting on Upside Sharing Agreements (irrespective of their interest in the agreement) will make it a challenge for such agreements to be made effective.

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