Financial investors in India are scared of regulatory uncertainties. Not that uncertainties are exclusive to our country but it’s a critical risk factor that is assessed by those making substantial investments. Historically, one of the most important regulatory concerns for such investors is related to being categorised as ‘promoter’ of a listed company, both when the company is going public and also in cases where a private equity (PE) player intends to take a control position in an already listed company, by replacing its present promoters or by becoming co-promoters. Promoter liability theories have kept such investors away from taking control positions in listed companies. On the contrary, in the unlisted space where the promoter position is perceived differently, control deals are a way of life for certain PE funds in India.
Partner in the General Corporate Practice at the Mumbai Office of Cyril Amarchand Mangaldas. Gautam specializes in private equity investments, mergers and acquisitions, securities law and legal advisory across diverse sectors. He has acted for various private equity firms and leading Indian and multinational corporations across industry lines. He can be reached at firstname.lastname@example.org
It seems we live in an independent director-bashing era. News articles, blogs, scholarly write-ups are replete with criticism relating to independent directors, whether it’s to do with their appointment, ‘true’ independence, removal, resignation or generally their very existence! Anything remotely connected to what such directors do is presented as wrong. From a legal stand point, however, the law of director’s liability and fiduciary duties applies equally to independent directors. Such directors do not have any meaningful defence available to them by the mere taxonomy of the position held by them. Why then is the sentiment so negative?
Critics argue that the key issue emanates from the method of appointment of such directors because they feel that the people chosen are typically those that are close to promoters and can influence decision making. But practically, a total stranger on board could be the worst choice even for truly independent decision making.
This piece was previously published in the Economic Times
Next on the list of dilemmas relating to corporate governance issues for independent directors (ID) of a listed company is Board Evaluations. These are 360-degree reviews of the performance of a board of directors, conducted by the Nomination and Remuneration Committee (NRC). In a formal board evaluation process, each director reviews the other.
Interestingly, based on such evaluation, the NRC has to determine (amongst other things) whether an ID should continue holding his directorship or not. Earlier on, such evaluations were voluntary and some companies have been making generic voluntary disclosures in the annual report stating that the evaluation was conducted and recommendations were absorbed for improvement of board functioning. Going forward, the content of this disclosure will change.
As per the market regulator Securities and Exchange Board of India’s (SEBI) order dated March 31, 2017, in the Kamat Hotels (India) Limited (Kamat Hotels) case, Clearwater Capital (Clearwater) had subscribed to the foreign currency convertible bonds (FCCBs) of Kamat Hotels. Pursuant to a change in the applicable regulation relating to the conversion price for FCCBs, Kamat Hotels passed necessary resolutions approving the revision in price for conversion of FCCBs. Clearwater entered into an inter-se agreement (Agreement) with Kamat Hotels and its promoters on August 13, 2010. The Agreement expired on July 31, 2014. The Agreement had certain affirmative voting rights as are typical for the private equity (PE) investors to have for protection of their interests. Clearwater decided to convert the FCCBs into equity shares on January 11, 2012. The conversion resulted in increase in the shareholding of Clearwater from 24.50% to 32.23% requiring Clearwater to make an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations).
The open offer was made only under Regulation 3(1) which relates to acquisition of equity shares/voting rights and not under Regulation 4 (relating to acquisition of control). SEBI issued an observation letter on the draft letter of the offer filed for the open offer. SEBI’s letter stated that Clearwater acquired control under the Agreement in the year 2010 itself as certain affirmative voting rights/ protective covenants gave control to Clearwater and therefore, the open offer should have been made under Regulation 12 (relating to acquisition of control) of the 1997 Takeover Regulations. The protective covenants mandated approval of Clearwater before altering the share capital of Kamat Hotels, creating new subsidiaries, entering joint ventures, disposing or acquiring any material assets, lending or borrowing money beyond certain limits, winding up, etc.