Sebi should not dilute RPT norms, says IiAS

Demands Companies Act align with Clause 49 in the interest of investors, and not the other way around

Proxy advisory firm Institutional Investor Advisory Services (IiAS) has asked the market regulator to stick to its rules governing related party transactions (RPT). IiAS has slammed the recommendation by the ministry of corporate affairs (MCA) to dilute the Securities and Exchange Board of India (Sebi) rules as an anti-investor move.

The MCA had asked Sebi to align its provisions regarding RPTs 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 firm said in a report on Thursday.

The MCA has steadily diluted its stance on related party transactions since mid-2014: It lowered the threshold to pass resolutions to 50 per cent from 75 per cent, 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 advisory said.

“Undeniably, having two sets of regulations makes it complex for companies to operate. 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,” the firm added.

The proposed changes would make the rules meaningless as minority shareholders would not be able to block unfair transactions, it explained. "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," IiAS said.

This would be in addition to 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 or give a framework. Therefore, it is left open to companies and their boards to decide.

IiAS' research showed that only nine 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.