Corporate Governance and Minority Protection: Dissecting SEBI’s New LODR Framework for HVDLEs
Introduction
The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2025 (SEBI LODR) (‘the amendments’)were notified on the 28th of March, which were further modified on 1st May, 2025. Through these amendments, a new Chapter V A is inserted after Chapter V of the SEBI (LODR) 2015, which deals with the corporate governance norms for a listed entity that has listed its non-convertible debt securities. The amendments revise the definition and compliance framework for High-Value Debt Listed Entities (‘HVDLEs’), raising the threshold to ₹1,000 crore of outstanding listed debt securities and extending several governance obligations that earlier existed for equity-listed companies. While the changes appear praiseworthy, their applicability and impact on minority shareholders remain unaddressed. This article shall analyse the impact of SEBI LODR (Amendments), 2025, on minority shareholder rights on three parameters. Firstly, the composition of the board of directors, secondly, the new procedure for appointment of directors, and lastly, the inapplicability of mandates during insolvency proceedings. Through these analyses, the article argues that the amendments strengthen minority protection in several respects. However, certain gaps remain, specifically during insolvency procedures, which if addressed, would enhance minority protection. The article also proposes solutions to address these gaps.
The Amended Composition for the Board of Directors
On analysis, it is found that the amendment strives to regulate composition of the board of directors in a twofold manner. Firstly, by a mandate for non-executive directors, which helps in internal management and secondly, by regulating the total number of directorships a director can hold to ensure quality oversight that strengthens minority protection.
Under chapter V A, regulation 62D(1) is inserted to mandate a woman director in the board of directors along with a mandated mix of executive and non-executive directors. These non-executive directors must not be less than half of the board for HVDLEs. The Supreme Court in the case of Pooja Ravinder Devidasani v. State of Maharashtra held that non-executive directors are custodians of governance of company. However, they only oversee executive actions and are not involved in day-to-day affairs of the company. Therefore, the mandate for more than half of total board strength being non-executive directors is a step towards minority shareholder’s protection. According to Cadbury Report, the number of non-executive directors must be such that they are able to influence board decisions, as these directors act independently. Independence ensures that these directors are not subjected to pressure. Resultantly, they are more likely to act in shareholders’ interest, including minority shareholders. This is especially essential when shareholders’ interests run counter to those of “entrenched management”.
In addition to the mandate for non-executive directors, the total number of directorships by a director is regulated. The earlier SEBI LODR Regulations under Regulation 17A, provided for a maximum of seven directorships or independent directorships an individual can hold in listed entities. However, HDVLEs were excluded while considering the number of directorships. This would essentially allow a person to hold directorial positions in multiple HVDLEs, thereby leading to exploitation on two grounds. Firstly, for the companies as a director operating across multiple companies will not provide meaningful oversight and secondly, for minority shareholders, as an ineffective oversight by independent director would increase chances of bias towards majority or a tunnelling behaviour.
However, now the directorship positions held in HVDLEs are also considered for determining the number of directorship positions, under the amended Regulation 17A. Further, a bar of three listed entities is placed on independent directors, those serving as whole-time directors or managing directors in any listed entity. The amendment therefore ensures that directors give adequate attention to all listed entities, irrespective of the type of security listed. Such inclusion of HVDLEs in the count for maximum number of directorships, strengthens corporate governance and protection of investors in both aspects of debt and equity. However, some may argue that a mere numerical cap does not guarantee quality oversight, especially because HVDLEs are different from equity listed entities.
In HVDLEs, financing largely depends on debts, therefore, a management of debentures and investors is required along with expertise in insolvency risks. Since the amendment does not distinguish between equity listed entities and HVDLEs and places a blanket cap on the total number of directorships, it may discourage independent directors. Holding directorships in HVDLEs might appear less attractive than in equity boards as they are “costlier” in terms of time and compliance risks. Therefore, protection of minority might weaken given the reduced pool of independent directors willing to take up responsibilities in HVDLEs. But the mandate on the number of independent directors and their presence in board meetings, under amended Regulation 62 counters the same. However, to further strengthen the framework, ‘commitment disclosure’ can be mandated, like done in United Kingdom. This shall shift focus from a numerical cap to checking whether directors can dedicate sufficient time or not, thereby ensuring adequate governance along with improved minority representation and protection.
However, before mandating such ‘commitment disclosure’ it shall be vital to define a standard for “sufficient time” or a threshold for consideration of “meaningful engagement” or what shall truly constitute a ‘commitment’. This becomes especially essential for directors as no mandate exists for maintenance of timesheets for directors. Furthermore, each company requires different expertise and different time engagements according to situations. For example, Tata Sons Private Limited, in its 104th Annual Report for the financial year 2021-22 indicated that an independent director attended nine board meetings. Whereas, in the year 2022-23 the same independent director attended six board meetings, as shared via the 105th Annual Report. This is indicative of the fact that time engagements and commitments of directors keep varying depending on circumstances. Therefore, in absence of a standardised threshold for “sufficient time” and “meaningful engagement” for directors, the numeric cap being a quantitative threshold is a welcomed step that strives to achieve “quality oversight”.
Decoding The New Director Appointment Procedure
Board appointment is very necessary as it influences decision-making on debt servicing, restructuring, and risk management. Regarding appointments and reappointments, Regulation 62D (2) is added. This provision put an age cap of 75 years along with a mandate for special resolution to be passed by shareholders for persons to continue as non-executive directors. The requirement for special resolution in place of ordinary resolution is a push towards minority protection, as the chances of representation increase given the requirement for at least seventy five percent votes in favour of the motion. Also, after appointment or reappointment, a ratification by shareholders is required at a general meeting or within the next 3 months, whichever is earlier. This shall provide minority shareholders a timely opportunity to scrutinise and vote on appointments. This is to be done at least once in five years from the date of appointment or reappointment, as the case may be. Also, according to the amendments, “if the chairperson is non-executive, at least one-third of the Board should comprise independent directors. When the chairperson is a promoter or related to a promoter, at least half the Board must consist of independent directors.” This further ensures non-infringement of minority rights.
When analysed, it is noticeable that the regulations strive to ensure the independence of directors as a means to ensure minority interests. Independence of directors was recognised as a proprietary right for shareholders, including minority shareholders in the case of Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd. The Supreme Court held that this includes a right to be governed in accordance with articles of association and provisions of The Companies Act, 2013. Also, the independence and autonomy of the board is guaranteed by the law. Therefore, any action that encroaches upon the independence of the board due to the influence of majority shareholders is unwarranted and violative of the proprietary rights of minority shareholders.
In furtherance of the interest of minorities, there existed a possibility of the appointment of a director that favours the majority. A misuse of majority can be seen in the case of Escientia Life Sciences v. Escientia Advanced Sciences (P) Ltd., where majority shareholders, through their nominee director, had pushed for the appointment of Chief Operation Officer (‘COO’), marginalising founding promoters and minorities. This appointment was done without the unanimous consensus of board, which subsequently resulted in mismanagement and diversion. Therefore, to counter such situations, Regulation 62(D)(7) is added. It mandates that the “quorum for every board meeting shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director.” Therefore, it becomes difficult to marginalise minority’s interests in two instances. Firstly, during the appointment of an independent director by a special majority and secondly, during the general meetings, given the mandate of at least one independent director. This ensures that the board meetings are not dominated by promoter-controlled directors, while ensuring an independent check on decisions impacting debt servicing, governance, and compliance.
Understanding the Applicability and Concerns
In previous LODR regulations, there were no exit options available. This meant that once an entity met the required threshold of listed non-convertible securities, it would remain an HVDLE even if its non-convertible securities were reduced. However, now a sunset clause is introduced. This provides entities with an exit option from classification. If the value of an entity’s outstanding listed debt securities falls below INR 1000 crore, as of 31st March in a particular year and remains below this threshold for three consecutive financial years, they will not be classified as HVDLEs according to the amendments to Regulation 15. While it appears to reduce the systemic risks to investors, there is also a possibility of exploitation, as it reduces the stricter governance norms that exist for HVDLEs.
Entities may strategically reduce and restructure debt issuance near the reporting date of 31st March to exit classification. If an entity has successfully exited the classification and subsequently issues fresh debt after the reporting date and the amount is beyond the 1000 crore threshold, it shall practically be an HVDLE. However, due to exit, it shall not be governed by stricter norms that exist for HVDLEs thereby leading to a “regulatory evasion” for an year. This allows exploitation on two grounds. Firstly, it leaves minority more vulnerable due to absence of stricter compliance when risks are high. Secondly, it encourages regulatory arbitrage by allowing short term balance sheet adjustments, rather than a focus on real financial risk. This therefore defeats SEBI’s intent for stricter governance based on risks associated with non-convertible debt securities.
Also, the non-applicability of provisions under Regulation 62D which deals with the board of directors, during the Corporate Insolvency Resolution Process (‘CIRP’) can both benefit and harm minority shareholders. The amended Regulation 62C(5), provides that the obligations for composition of board of directors become inapplicable during CIRP, as Sections 17 & 23 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) apply. These provisions of the IBC are related to the management of “affairs of corporate debtor” by the interim resolution professional and resolution professional respectively during the CIRP. Their authority extends to suspending the powers of the board of directors and exercising it themselves. Furthermore, Regulation 62C(6) of the amendments specifically makes amended Regulations 62F, 62G,62H,62I inapplicable during CIRP. Regulation 62C(6) proviso mandates that dealings with nomination and remuneration committee, stakeholders relationship committee, and the risk management committee shall be then done by the interim resolution professional or resolution professional, as the case may be, as per IBC. Therefore, it is evident that the authority shifts to the Committee of Creditors (‘CoC’) where Institutional creditors like banks and debenture trustees represent debt holders. This may safeguard minority indirectly or conversely sideline them. Also, the SEBI LODR mandates continuous disclosure for HVDLEs. Once exempted due to insolvency procedure, minorities will depend solely on IBC driven disclosures and public announcements. These are less frequent and less detailed than LODR mandates. Therefore, when specifically seen from the perspective of minority shareholders, the inapplicability of mentioned provisions acts as a double-edged sword.
Suggestions
While the amendments appear visionary for the protection of minority shareholders’ rights, there are a few areas that could be addressed to enhance legal protection. Firstly, while the inclusion of a cap on maximum directorships in HVDLEs is a safeguard against diluted oversight, protection can be enhanced by mandating disclosure of cross-directorships to prevent promoter networks from capturing boards. Especially for HVDLEs, mandates should be stricter. Because if HVDLEs are pushed towards insolvency due to mismanagement or otherwise, an exhausting liquidity along with a seized financial system could be witnessed, as was seen in 2018, during the IL&FS crisis.
Currently, under amended Regulation 62, standards are provided for determination of independent status, committee memberships and directorships. An additional requirement can be added for all directors to disclose cross directorships in companies. This is similar to the mandate of disclosure of interest by directors, under Section 184 of the Companies Act. Such disclosure will benefit minority in two aspects. Firstly, it will help regulators and shareholders in flagging risks of coordinated voting that might be disadvantageous to minority shareholders. However, it might come with a huge regulatory cost, therefore SEBI may adopt a ‘risk-based monitoring model’. Rather than investigating all cases, it may investigate cases which meet certain objective criteria. For example, where there exists concentration of voting power among interconnected directors, repeated related party transactions or abnormal voting patterns in general meetings etc, then SEBI may take action. This will ensure that probability of detection increases as petty and false cases will be screened out and will not consume time or resources. Secondly, such disclosure shall ensure transparency and determination of independence of directors which is important for minority protection. This disclosure can further be communicated to the public through annual reports or through stock exchange filings, benefitting future investors.
Secondly, to protect the interests of minorities after the resolution mechanism, a residual value sharing can be introduced. In most CIRPs, equity shareholders, including minorities, are wiped out as they are lower in the priority in repayment if debts. Furthermore, the Supreme Court in the case of Keshav Agrawal v. Abhijit Guhathakurta also established that minority shareholders cannot raise objections against a Resolution Plan (‘RP’) approved by the CoC. This poses a significant risk to minority shareholders. To address this issue, a reference to the United States of America (‘USA’) can be made. Under Chapter 11 of the USA Bankruptcy Code, the shareholders can preserve their right to vote and approve the reorganisation plan by filing a proof of interest. In India, shareholders have no statutory vote on the resolution plan. Therefore, a protect their interests, a process of filing proof of interest can be introduced in India, as it exists in the USA.
A possibility exists in implementing these changes through amendments in IBC, where under Section 38, “claims of creditors” are shared with the liquidator, a parallel could be introduced to share “proof of claim by equity shareholder.” However, such amendment will give rise to a conflict of roles and responsibilities between SEBI and IBC framework. Therefore, a middle ground should be found that ensures representation but does not intrude the exclusive domain of IBC. For example, under SEBI LODR amendments a provision for a shareholders’ consultation group (SCG), can be added bedsides various committees mandated under Regulation 62. This group shall review the resolution plan and highlight issues affecting shareholders but shall not vote on the resolution plan. This will ensure that minority shareholders in HVDLEs get a statutory channel to voice concerns, while creditors still retain decision-making primacy. Some may argue that such creation of SCG will intrude the exclusive and overriding domain of IBC as provided under Section 238 of the code. Therefore, it is suggested that the SCG shall only be advisory and not decisional with no voting rights provided to vote on the resolution plan. This shall create a complementary regulatory regime, like already suggested via SEBI’s discussion paper released in 2018 and the SEBI LODR Regulations. Both of these, require public disclosure of CIRP, which is ideally an exclusive domain of IBC. Therefore, it is safe to say that in absence of voting rights provided to SCG, it shall not intrude the exclusive domain of IBC while simultaneously increasing transparency for minority investors during insolvency proceedings.
Conclusion
Though not specifically targeted to enhance minority protection, the amendments have moved a step closer towards minority shareholders’ rights protection, specifically in reference to HVDLEs. Through mandates like composition of board of directors that includes at least fifty percent non-executive members to appointments and ratifications by special majority, the focus remains on independence of board to ensure that majority dominance does not encroach upon the rights of minority shareholders. However, the protection weakens during insolvency proceedings as decision making then is shifted to CoC and RPs, leaving minority largely dependent on limited IBC driven disclosures. This calls for stronger mechanisms to ensure consistent protection across the corporate lifecycle.