Related party transactions are not evil: Zia Mody

Interview with Managing partner, AZB & Partners

Corporate governance had taken centre stage with Parliament passing the Companies Act, 2013 in August 2013 and the capital market regulator further tightening norms for listed companies in recent months.In the past six months, about 30,000 representations have been made against the rules for over 355 sections of the new Companies Act that are yet to be notified, and only about 100 sections, which do not have reference to the rules, have been notified. Zia Mody, managing partner at one of the leading corporate law firms, AZB & Partners, talks to Abhineet Kumar on the challenges this has brought upon the companies and the regulator. Edited excerpts:

What are the key challenges in implementation of the Companies Act, 2013?

In terms of the actual implementation logistics, the immediate challenge for the government is to set up a responsible tribunal. Today, in the new Act, a lot of responsibilities that were earlier with the courts have now shifted to tribunals. It is a super-duper Company Law Board. You do not need to go to the courts for all necessities. A lot of courts' jurisdictions, such as amalgamations, have now shifted to the tribunal.

Second, of course, there are some new concepts and there are sometimes not the best of drafts. The problem is, once it is notified as an Act, you have to go to Parliament to change it. I think, the MCA (Ministry of Corporate Affairs) is trying to make a lot of the changes through rule-making. A lot of debate and a lot of representations are being made.

When do you see it settling down?

I think, in about a year.

Do you think, the mandatory spending of two per cent of net profit on corporate social responsibility (CSR) can be considered as business expenditure?

It will depend on how it is spent. If you, as a company, do CSR by giving money to a genuine not-for-profit foundation, that is already allowed deduction in accordance with the Income Tax Act. If you do it internally within the company, such as setting up a school for workers' children, then the fact that you are going to build this brick and mortar, is going to give you a depreciation and to the extent that you are paying for teachers, etc, that will be an expense. I am not a tax expert, but somehow, I think, it can be expensed out. Or, it will work towards being expensed out.

There is nothing wrong with that concept. Why is it that the government allows me a deduction if I give my money to the institute for the blind? I think, we should work towards that. I do not think that a government can resist that.

The new Act allows class action suits. Who do you think will be using it?

I think, we will first see some activists, NGOs, or we can see minority vested interests using it. We can also see competitors putting up a class of shareholders to start a class-action against a company.

We already have oppression and minority mismanagement under our current laws. You need 100 shareholders for that. What this will do is, save you the trouble of going out to 100 shareholders, maybe, have fewer and demonstrate that there is a wider class of interest, which can classify as a public interest action or class action.

But what can happen if everything takes 20 years? The class-action ultimately means money, it does not mean an injunction. Two things are important for class action suits to have an effect. First, the time period for a decision is cut down and the law of tort is developed better. In the US when you have class action, it is finished in two years.

Sebi recently clamped down on Related Party Transactions (RPTs) by asking for prior approval of audit committee and approval of RPTs by shareholders through special resolution with related parties abstaining from voting. How do you look at it?

My own view is that it is going a little far. They say it is not at arm's length if it is this or that. I fear that in hindsight Sebi will come back and say it was not at arm's length. Who is going to decide the commercials? The board of the company, or Sebi, or some class action shareholders, or some Public Interest Suite. So, I think, you are creating interference in governance. I felt, it was already done when the audit committee had to sign on related party contracts and independents were heading the audit committee.

There is clear liability for doing the job on audit committee. I think, this is happening because Sebi feels that despite whatever is in the rule book, the DNA is not in the right place. The circumvention of this is happening. Now, therefore, they are taking it one step further. They are going to make it kind of impossible. But I do not think related party transactions are evil by themselves. So I think, it is taken up to a slightly polarised level. We will have to see how corporate workings pan out. If it proves to be too difficult, there will be some push back.

According to Sebi guidelines, about 1,000 women directors posts are to be filled by October 1. What kind of challenges will it have?

It will be a step at a time. Maybe, some companies won't find the directors and they will be given more time. Frankly, you do not have to have women as independent directors that was actually a proposal that didn't go through.

So you can have women in the family who can become directors. For women, it will be a learning process. It will take time, but personally, that is okay. May be it is a quota, so what? Why is it that she must have the same merit? Every man is not brilliant, so it is a learning process. If you talk to me 10 years later, you will have a different scenario. So we are starting, and I am very happy that Sebi has started.