Can ex-gratia payment (profit) be shared with senior management as a token of Appreciation?

SEBI issues informal guidance to PNB Housing Finance Limited (PNBHFL) under the Informal Guidance Scheme and under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR).

SEBI stated that PNBHFL would have to comply with Regulation 26(6) of LODR which deals with certain obligations with respect to employees including senior management, key managerial persons, directors and promoters.

Facts of the case are as follows:

• PNBHFL is listed on BSE and NSE pursuant to its IPO on 7^th November, 2016
• M/s Destimoney Enterprises Limited, Mauritius (DEL-Mauritius) acquired 49% of the share capital of PNBHFL in 2009. The shares were acquired by DEL Mauritius through its subsidiary M/s Destimoney Enterprises Limited (DEL-India). Principal assets of DEL-India were shares of PNBHFL
• In 2015, DEL-Mauritius’s holding in DEL-India was acquired by Quality Investments Holdings, Mauritius (QIH)
• After the sale, DEL-Mauritius received excellent returns on its investment in PNBHFL
• As a result, DEL Mauritius decided to make ex-gratia payments to the senior management of PNBHFL as a token of appreciation
• However, the proposal was put on hold as there was no clarity on the legality of such payments
• DEL-Mauritius decided to revive the proposal when the Company got listed

However, the proposal was put on hold as there was no clarity on the legality of such payments DEL-Mauritius decided to revive the proposal when the Company got listed NBHFL has raised query with SEBI seeking informal guidance whether the aforesaid transaction (receipt of ex-gratia payments) would require prior approval of the board of directors and shareholders.

Regulation 26(6) of LODR was introduced via amendment on 4^th January, 2017 with immediate effect. It states that:

No employee including key managerial personnel or director or promoter of a listed entity shall enter into any agreement for himself or on behalf of any other person, with any shareholder or any other third party with regard to compensation or profit sharing in connection with dealings in the securities of such listed entity, unless prior approval for the same has been obtained from the Board of Directors as well as public shareholders by way of an ordinary resolution..

The shares of DEL-India have been transferred from DEL-Mauritius to QIH in 2015. There was no direct dealing in shares of PNBHFL by DEL Mauritius or by DEL-India

But, the primary assets of DEL-India were shares of PNBHFL and hence there is an indirect dealing.

The sale of shares from DEL-Mauritius to QIH took place in 2015 when PNBHFL was an unlisted company.  PNBHFL was listed in November, 2016.  However, the proposal to make payments was revived when the company is listed and Regulation 26(6) of LODR is effective.

Hence, the SEBI concluded that the above transaction would be covered under Regulation 26(6) of LODR and PNBHFL would require approval from board of directors and shareholders before accepting ex-gratia payments from DEL-Mauritius.