Companies preparing to go public are advised to give up their director nominating rights

The Securities and Exchange Board of India (Sebi) has asked the companies seeking Initial Public Offerings (IPOs) to give up their director nominating rights. They have been asked to amend the articles of association and remove the director nomination powers granted to promoters and other shareholders. According to people familiar with the development, they must instead get shareholder permission for such rights after listing. The action aims to improve corporate governance.

The ability of shareholders to nominate directors to the board continues to exist even when all other special rights cease to exist when a business goes public, according to Sebi. Market analysts argued that the action was consistent with Sebi’s recent initiatives to prevent the abuse of board positions in listed businesses.

The most recent change will result in the extinction of all prior special rights held by promoters or investor shareholders at the time of listing. For instance, when it was filed in July of last year, the draft red herring prospectus of Utkarsh Small Finance Bank Ltd, which successfully concluded its IPO on Friday, contained this clause.

These rights, however, were not mentioned in the company’s articles of association when the bank submitted its red herring prospectus on July 6 in advance of the IPO launch.