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Raising concerns over share price based incentives through private pacts, regulator Sebi on Tuesday proposed making it mandatory to take prior approval from shareholders for such agreements inked by private equity investors with promoters and top executives of listed firms.

Sebi said that certain private equity (PE) firms have entered into agreements with top management of listed entities by which such PE firms would share some portion of the gains above a certain threshold limit made by them at the time of selling the shares.

This pact is also subject to conditions that the company achieves certain performance criteria and the top management continues with the company for a certain period.

Sebi said that when such reward “agreements are executed between the private equity investor and the promoter/MD of the listed entity without any prior approval of shareholders, it does give rise to concerns. It could potentially lead to unfair practice.”

“No employee, including key managerial personnel, director or promoter of a listed entity shall enter into any agreement with any individual shareholder... 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,” Sebi said in draft paper on ‘Corporate governance issues in compensation agreements’.

In case of existing profit sharing agreements, they would need to be submitted to the stock exchanges for public dissemination.

Besides, approval would need to be obtained from their boards and shareholders within stipulated timelines.