Changes in Companies Act concerns minority shareholders

Fund managers fear they could lose the battle with the promoters in abusive related-party transactions

The recent amendments to the Companies Act approved by the Cabinet have not gone down well with minority shareholders, who are concerned that their powers might get diluted.

“The amendments boast of promoting businesses but the flip side is we could lose the battle with the promoters in abusive related-party transactions (RPTs),” said a fund manager who did not wish to be named.

Last week, the Cabinet approved key amendments to Companies Act, 2013, including approval by audit committees for RPTs, replacing special resolutions with ordinary resolutions for RPTs by minority shareholders and exempting approval by minority shareholders for RPTs between companies and their wholly-owned subsidiaries.

Currently, to pass a resolution that falls under the ambit of RPTs, companies need to have the approval of the ‘majority of minority shareholders’. Legal experts say if the amendments are approved by Parliament, 50 per cent of minority shareholders’ nod would be sufficient to pass a resolution. The impact on listed companies would be felt only if the Securities and Exchange Board of India (Sebi)’s corporate governance norms are aligned with the changes in Companies Act.

“As the Companies Act is passed by Parliament, it is generally considered to be more powerful compared to the Sebi Act in cases where both the acts apply. However, historically, the Act which is stricter of the two has been the ruling one in cases where both acts have equal applicability,” said a lawyer with a leading law firm. With the approval of this clause, minority shareholders fear they might lose their edge while the controversial Maruti Suzuki Gujarat plant proposal comes to vote.

The carmaker had said earlier this month that it deferred its plan to seek minority shareholders’ nod over the controversial Gujarat plant transfer to parent Suzuki after the proposed relaxation in the Act comes into effect.

The proposed amendments further increase the responsibilities of the audit committee. The move, proxy advisory firms say, might not be effective in protecting minority shareholders’ interests.

“The best examples are the silence of audit committee on abusive RPTs in case of United Spirits or JSW Group. The audit committees of these companies approved all transactions. With this, amendment audit committee has powers but responsibilities are on paper only,” said a proxy advisory firm.

According to legal experts, the new amendments to the Act are done following market feedback. “These amendments address some of the issues raised by stakeholders, including chartered accountants, and respond to representations made by auditors and corporates, redress problems faced by large stakeholders who are related parties,” said Yogesh Sharma, partner (assurance), Grant Thornton India.