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RPTs: SEBI Must Not Budge!

Published on Wed, Jul 15,2015 | 23:24, Updated at Wed, Jul 15 at 23:24Source : Moneycontrol.com 

IIAS says…
The Ministry of Corporate Affairs has asked SEBI to align its provisions regarding related party transactions with the Companies Act 2013. IiAS believes SEBI should hold its own. SEBI’s provisions on related party transactions protect minority interest, while MCA has diluted its position to promote the ‘ease of doing business’.

The Ministry of Corporate Affairs has steadily diluted its stance on related party transactions since mid-2014: it lowered the threshold to pass resolutions to 50% from 75%, and prevented only interested parties from voting while allowing related parties to vote. SEBI has not aligned itself to the new regulations – and rightfully so.

The discussion over related party transactions brings to light the differing agendas of MCA and SEBI. While MCA’s goal is to improve the ‘ease of doing business,’ SEBI’s is to protect investors. Therefore, while MCA can diluted its stance on related party transactions, SEBI will be better served in not doing so.

The pickle is not as much in the passing threshold of 50%. Sure, coming down from the staunch 75% does seem like a dilution, but governments are elected with a 50% majority (and some formed with far less). Preventing interested parties from voting, yet allowing related parties to vote takes away all meaning. Most promoter shareholding is held through a series of promoter entities (companies, trusts, and partnerships) and is also spread across a catalogue of family members. With the amendment of the Companies Act 2013, the family and promoter entities not directly involved in the transaction can vote on the transaction, since they are not interested parties. This cuts the powers of minority shareholders at the knees. Promoters will likely manipulate their holding structures (to suit the regulations) to get their way once again, and minority shareholders, despite their ‘empowered status’ under the new regulations, will be unable to block unfair transactions.   

Add to this, is the ambiguity regarding which transactions will be brought to vote. The Companies Act 2013 requires that transactions in the ordinary course of business and at arm’s length do not require shareholder approval. But, how do companies define ‘ordinary course of business’? The Act does not provide a definition nor does it give a framework – and therefore, it is left open to companies and their boards to decide. IiAS’ research showed that only 9 out of the 30 S&P BSE SENSEX companies had attempted to define ‘ordinary course of business’ in their policy regarding related party transactions. SEBI, to that extent, has a much simpler and clearer method of defining which transactions will come to shareholders for a vote – all those that account for over 10% of turnover.

Undeniably, having two sets of regulations makes it complex for companies to operate. A couple of companies have designed long flow charts to help their internal teams and board members decide if a transaction needs board or shareholder approval. Such complexity is unnecessary and an alignment of regulations is imperative – in the interest of minority shareholders, the Companies Act 2013 needs to align itself to SEBI’s Clause 49 requirements for listed companies, and not the other way around.

Attachments : IE_RPT_SEBIMustNotBudge_9Jul2015.pdf
 
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