SEBI lens on illicit PE deals with promoters

Mumbai

: Capital market regulator SEBI is looking into unlawful side deals being worked out between private equity investors and promoters of companies to incentivise the latter for stock performance.

The move comes in the wake of the regulator finding a few instances wherein promoters have received rewards from private equity (PE) investors after booking profits on company stocks. In some cases, shares were allotted on preferential basis to PE investors, along with working out side agreements, for rewards on stock performance.

According to regulatory sources, SEBI have received a few complaints about side agreements between promoters and investors without proper disclosures to shareholders that are required under the law.

“We have received complaints about agreements between PE investors and promoters that are not disclosed. We are examining these cases,” said a senior SEBI official.

According to PE circles, these kinds of performance-linked incentives are worked out in the unlisted space, but in listed companies any such agreement should be disclosed upfront as public investors should know such private deals.

“There are innovative structures being worked out among promoters, PE investors and management to incentivise performance. It is good from a commercial point, especially in unlisted firms. But for listed companies, there are legal issues to be addressed beforehand,” says Raja Lahiri, partner, Grant Thornton India.

Recently, the regulator has stumbled upon a case wherein Ajay Bijli, MD and promoter of multiplex chain PVR, was rewarded by Multiples PE from gains made by it on the firm’s stock. Bijli was paid Rs 3.64 crore under an ‘incentive fee side agreement’ between the two that allows payment of 20 per cent of excess profits earned by Multiples over and above a 30 per cent internal rate of return it generated on its investments in PVR. In 2013, the firm had issued shares via preferential allotment to the Multiples and the PE rewarded the promoter after booking profit on them. It is later learned that details of the agreement were not disclosed to public investors by the firm or the promoter.

“This practice amounts to indirect remuneration being paid to promoter managing director without knowledge and approval of shareholders and making mockery of law and shareholders rights,” says JN Gupta, MD Stakeholders Empowerment Services (SES).

“Additionally, this exposes non-transparent functioning of PE funds, which enter into such agreements perhaps without the knowledge of their investors,” added Gupta, himself a former executive director with SEBI. According to sources, in several companies similar deals are being worked out between promoters and PE investors after issuing shares under preferential allotment route. Shares were issued to investors in several rounds even though these investors have sold shares within a short period of time.

In the case of PVR, shares were issued under preferential allotments to Multiples in 2013 and 2015. The PE had sold a part of shares, allotted in January 2013, in July 2014. Shares were again allotted to it in July 2015.

Such arrangement between promoters and preferential allottees (PE investors in this case) shake the faith of common investors in the system and are certainly not a healthy practice. A full-fledged investigation by market regulator is warranted to weed out all such cases, hand out appropriate penalty and take corrective action to ensure that malaise is stopped forthwith, SES said in a note.