Disclosure of shareholders’ pacts: Jo wada kiya wo bataana padega

Scope of Clause 5A of Schedule III.A.A, r/w Reg 30A

Vinod Kothari, Managing Partner | corplaw@vinodkothari.com

The spate of new disclosure requirements introduced by Reg 30 of the Listing Regulations includes one of the most controversial pieces – disclosure of shareholders’ agreements which may impact or are designed to impact the management or control of a listed entity. This requirement is applicable not only to the pacts entered into after the effective date of the amendment, but also to existing agreements, which, by reg. 30A, need to be bared by the contracting parties to the company, and the company in turn, will need to upload this information to the public. There are views circula that the entire body of such agreement has to be made public.

We cannot miss the fact that a sizeable portion of the capital of listed companies in India is held by families. An OECD document says nearly half of the listed companies’ capital in India is held by promoter families.

Naturally, anything that pierces, peeps in or lifts the veil of family arrangements is as challenging as any attempt to get into anyone’s privacy. Note that privacy concerns are not in any way less important for promoter families, than for yours or mine.

Therefore, evidently, this issue has raked up a lot of controversy. Compliance Officers are even facing the query as to whether a will is also required to be disclosed.    

First of all, let it be clear that a will is super confidential, and there is nothing in any law or regulation that may require disclosure of a will, during the lifetime of an individual. Will is not an agreement either.

The word “agreement” implies a mutually binding agreement between two parties, inter vivos. A settlement by way of a trust, and a trustee accepting obligation to hold a property in trust subject to wishes of the settlor is not an agreement. Agreement has to be mutual; a trust is one-sided. 

Promoters and promoter group entities have disclosed shareholding in the company. If the promoters are part of a family, as they normally are, they might have internal understanding on who will look after what aspect of the listed company’s management. They may also, at times, have family level understanding that one entity will be looked after by Brother A, while another will be looked after by Brother B. These are part of a family’s understanding or settlement.

These understandings, even if scripted, do not constitute “agreement”, which is founded on consideration and mutual performance obligations.

Settlements of one’s holdings, by way of a will or a trust deed during lifetime providing for allocation or distribution of one’s holdings, is not an agreement. See Vimal Kishor Shah vs Jayesh Shah.

Therefore, the key questions to ask are:

• Is the piece of paper an agreement? If there is purely an oral understanding, there is nothing to file, as such understanding is no more than a family’s innate internal accord.
• If it is succession or inheritance related, in our view, it is completely private information, and in any case, cannot be an “agreement”.
• If it is an MoU, there are rulings to suggest that an MoU is not an agreement, unless it is intended to be binding.
• In essence, it will be an agreement, only when it contains mutually binding, enforceable, actionable matters pertaining to the management or control of the listed entity.
• Is this agreement relating to management or control of the listed entity? Does it have clauses which pertain to management or control, or the way the family manages or controls the listed entity, or does it have clauses whereby the management or control of the listed entity will be continued, carried or impacted? If each of the above is answered in the affirmative, the contracting parties should consider disclosing their pact.
• Whether the listed entity is a party, or a confirming party, or not, should not matter. Here, the question is not enforceability against the listed entity – the question is shareholder information. Rulings such as V B Rangaraj [https://indiankanoon.org/doc/140212/] are not relevant for this purpose

Assuming that the agreement requires disclosure, are we talking about disclosure of the entire agreement? Surely not. It is only the part of the agreement which is pertaining to the management or control of the listed entity which will be relevant here. This is sufficiently clear from the guidance provided in Annexure I of SEBI Circular of July, 2023 providing for details to be disclosed in relation to such agreements.

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