Will Sebi realign with Cos Act again?

In a remarkable victory for minority shareholders, nine out of 12 resolutions on related party transactions (RPTs) of United Spirits were defeated last month. This was made possible by the changes brought in by the new companies law, which were then modified and adopted by the Securities and Exchange Board of India (Sebi) in its new Clause 49 of the listing agreement that took effect on October 1.

This should have been celebrated as the "green shoots" event for shareholder democracy in the country. But, guess what happened here.

The 'tyranny of the minority' was lamented as reports of how shareholders who held just four per cent stake were able to defeat some resolutions. Before long, the cabinet cleared The Companies (Amendments ) Bill, 2014. Last week, this was tabled in the Parliament too.

Among other things, the Bill seeks to further amend the provisions governing RPTs. It seeks to exempt wholly owned subsidiaries from the RPT rule and also wants to provide for annual omnibus approvals from the audit committee instead of case-by-case approvals.

It further intends "to amend sub-section (1) of section 188 of the said Act for replacing 'special resolution' with 'resolution' for approval of related party transactions by non-related shareholders." A special resolution requires three-fourth majority while an ordinary resolution can go through if more than half of the votes polled are in its favour.

Given that the Special-ordinary difference matters more in the listed space, the ultimate target seems to be the dilution of Sebi norms for which calls have already emanated in the public fora. Sebi's holding power may be limited if the parliament passes the bill and 'realignment', an euphemism for dilution, may only be a matter of time.

The Bill justifies itself as follows:, "Government has received representations from various stakeholders (including Industry Chambers, Professional Institutes, Legal Experts and Ministries/Departments) expressing practical difficulties in complying with some of the requirements laid down in the commenced provisions... Some of the amendments are also required with a view to further facilitate 'ease of doing business' and deal with certain difficulties in this behalf brought out by Industry Chambers and other agencies."

It is not difficult to identify the missing constituency there. The words "investors" or "investor associations" are conspicuous by their absence in that paragraph.

Now, while the 'practical difficulties' argument can be applied in the first two amendments relating to wholly owned subsidiaries and omnibus approvals, it cannot be applied to the amendment to do away with 'special resolution.' Getting consent of the part owners of the company on a transaction, in which some shareholders have interest, is not a practical difficulty, it is an issue of fundamental corporate hygiene. After all, the question of approval by non-related shareholders arises only when the related party comes in to the picture. It's the other side of the same coin.

Instead of doing a U-turn, the government should allow the 'special' regime to continue for at least a couple of years. That will encourage companies to keep out abusive RPTs, which are recognized as a menace by international organizations such as OECD. If at all an RPT is unavoidable, the test of special resolution will encourage managements to reach out to all stakeholders and be more transparent. As more cases come up, the awareness levels also increase and responses become more nuanced. A review can be done after a certain period agreeable to all parties, say two years, to see if the scaling down is necessary.

In its haste to be seen enhancing ease of doing business the government should not undo the progress made in protecting minority investor interests. That would amount to selling one's eyes to buy a painting.