Sebi reviews mechanism regarding guarantees extended by listed firms

To protect the interests of shareholders, regulator Sebi on Friday proposed that a listed entity shall obtain prior approval from the shareholders on a "majority of minority" basis, before extending any loan, guarantee or security for the benefit of promoter entities.

Sebi, in a consultation paper, said the listed entity shall extend a guarantee or security to any person or entity, including promoter, promoter group, director, directors' relative and key management person, considering the "economic interest" of the company.

"This consultation paper is aimed at reviewing the practice of listed companies extending corporate guarantees/ security for the benefit of promoter/promoter-related entities, where the listed companies do not derive any economic benefit," it noted.

Reviewing the current regulatory mechanism, Sebi noted that provisions of the Companies Act deal with providing any loan or any guarantee or security in connection with loans of directors or related entities but does not cover promoter, promoter group and key management person, among others.

Sebi noted that "economic interest" involves financial interest of the entity but a specific legal definition of "economic substance" is not readily available.

The markets regulator said definition of economic interest may be evolved and noted that any transaction involving "economic interest" of the company shall necessarily have direct or indirect financial implication on the business activity of the firm which apart from monetary transactions may also include competitive position, employment, awarding of contracts, purchases, leases and sales, among others.

Besides, it should have a reasonable possibility of generating direct or indirect benefits for the company and the benefits of such transactions shall necessarily accrue to the shareholders of the listed entity.

The proposal of Sebi are in addition to provisions of the Companies Act, 2013, and disclosure requirements of Sebi LODR (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Comments from public have been sought on the proposals by March 21, 2020.

The proposals came in the aftermath of instances where listed companies have extended corporate guarantees on behalf of their promoters or promoter-related entities.

"It is also observed that, at times, promoter/promoter related entities have sourced funds through various complex structures and structured obligations, for which the listed companies have provided guarantees, detrimental to the interest of their shareholders," Sebi said.