The Securities and Exchange Board of India (SEBI) on Tuesday came out with a consultation paper on corporate governance issues in compensation agreements. The consultation paper seeks public comments on the possible amendment to Sebi’s listing obligations and disclosure requirements.

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The amendment says that no employee, including key managerial personnel, director or promoter can enter into any agreement on compensation or profit sharing with an individual shareholder or third party entity without approval from the board and shareholders.

This new sub-regulation may be added to Regulation 26, which pertains to obligations with respect to directors and senior directors, said Sebi in the paper.

“No employee, including key managerial personnel, director or promoter of a listed entity shall enter into any agreement with any individual shareholder(s) or any other third party with regard to compensation or profit sharing unless prior approval has been obtained from the Board as well as shareholders by way of an ordinary resolution,” it said in the paper.

This is provided that all such existing agreements entered into prior to the date of notification and which may continue beyond such date need to be informed to the stock exchanges for public dissemination. Apart from this an approval needs to be obtained from shareholders by way of an ordinary resolution in their forthcoming general meeting. If in case the approval from shareholders is not received, the agreements shall be discontinued, it added.

Sebi has given a deadline of October 18, 2016 for the recommendations to be sent.

The reason for this consultation paper Sebi said as it could potentially lead to unfair practices. It felt that such agreements are not desirable and hence it is necessary to regulate such practices.

“It is not unusual for private equity funds to incentivise promoters/ MDs/ CEOs of investee companies, based on performance of such companies. However, when such reward agreements are executed between the private equity investor and the Promoter/ MD of the listed entity without any prior approval of the shareholders, it does give rise to concerns,” it said.