The Securities and Exchange Board of India (SEBI) has made a recommendation to the Ministry of Corporate Affairs (MCA) to “suitably amend” the Companies Bill, 2009, “to disallow interested shareholders from voting on the special resolu-tion of prescribed related party transaction.”
In a press release, SEBI said the move was aimed at protecting small and diversified shareholders in listed companies from abusive related party transactions. This column will not join the applause for the measure, since it represents a huge opportunity loss.
First, a bit on the issue involved – transactions between a listed company and entities under the management or control of persons controlling the listed company have the potential to be abusive to the listed company and thereby to shareholders other than those in control of the listed company.
For example, a listed company could enter into a lease arrangement with a company belonging to a promoter for usage of some property. One possibility is that such a lease could result in the promoter earning more from the listed company as a lessee than he could from anyone else in the market being a lessee. Another possibility is that such a lease could in fact be completely unnecessary for the listed company even if its terms were more beneficial to the listed company as compared to market terms. The lease example is just a simple one – typically the case with many listed public sector undertakings that give their properties to government in sweetheart deals – and the size and complexity of related party transactions can be large and diverse.
The scope for abuse of public money being immense, accounting standards worldwide have developed special norms for disclosure of related party transactions by any company. Different jurisdictions have taken different degrees of measures to reg-ulate related party transactions – taking regulation to beyond disclosure and in fact, providing for shareholder approval.
However laudable any move to regulate abusive related party transactions, one should not get carried away merely by the fact that a regulator is talking about it. SEBI’s move to request the Ministry of Company Affairs to seek an amendment to proposed legislation that may eventually get passed by Parliament – God knows when, because the draft company law has done the rounds for nearly a decade now – sounds like a plaintive plea by Laxman’s “common man” who dislikes what is going on in the nation. A bit of research into its own past actions would have done SEBI proud.
To begin with, company law does not require related party transactions to be taken to shareholders for approval. However, SEBI is empowered under the SEBI Act, 1992 to take such measures as it deems fit, and issue such directions as it deems fit in order to secure the best interests of investors in the securities market. Using these powers, SEBI has steadily increased the bar in the listed space. Examples abound – while company law allows 90 days to a company to issue shares after allotment, listed companies have been forced to move this really close to a delivery-versus-payment standard for allotments in public offerings of securities. Securities laws require a scheme of arrangement involving a listed company to be presented to stock exchanges for approval before filing it in court, without company law requiring it.
SEBI could have well required listed companies to seek shareholder approval for transactions involving payment of above a material threshold, or of any size for that matter. Whether one should impose a fiduciary duty on a shareholder by asking an interested shareholder to refrain from voting on such a resolution is the next step.
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Here too, SEBI has set precedents. It has granted exemptions from making an open offer for preferential allotments, if the interested shareholder has not participated in the voting. SEBI’s regulations governing delisting already disallow interested shareholders from voting on the special resolution that is required to enable delisting. No company law amendment was made, and in fact, the MCA, which is represented on the SEBI board nodded in appr-oval. It seems that the regulators have lost the resolve despite set precedent.
Indeed, this is a case of two steps backward, rather than the illusory one step forward.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
Email: somasekhar@jsalaw.com