Balancing business interestsand rights of minority shareholders has never been an easy topic.No doubt therefore ‘Related Party Transactions’ have once again taken centre stage with the Companies (Amendment) Act, 2015 diluting the shareholder special resolution threshold (75% vote) with a shareholder ordinary resolution (51% vote), with effect from 29th May 2015.

Concentrated and complex ownership structures which exercise control over a web of connected entities are a common theme across jurisdictions. Abuse of minority rights in such structures is a continuing risk. The threat of corporate insiders engaging in self-dealing transactions at the expense of minority shareholders has sparked many debates. 

In addition to implementing safeguards to balance the interests of dominant stakeholders and minority shareholders, policy makers are also responsible for creating a business friendly environment. Draconian policies will therefore be negative for all: controlling stakeholders, minority shareholders, business growth.

The Companies (Amendment) Act, 2015 is certainly a step in the right direction. Related Party Transactions (RPTs) are not in themselves detrimental to minority shareholders. Adequate safeguards have been provided for ensuring that RPTs are scrutinised independent of controlling stakeholder influence: ‘interested’ directors are to abstain from board meeting and all discussions relating to a RPT; ‘interested’ related party shareholders are to abstain from voting on any RPT resolution (for listed companies all related parties are to abstain from voting on a material RPT resolution); audit committee approval is a prerequisite for RPTs (for listed companies);RPTs are to be disclosed on the company’s website (for listed companies). The Board of a company has fiduciary duties towards all shareholders (majority and minority), and each director is therefore responsible for ensuring that the RPT approval granted is in the larger interest of the organisation as a whole.

The multiple layer decision making process implicitly ensures protection of minority interest. Shifting the shareholder approval ceiling from 75% down to 51% (for private and public unlisted companies) was therefore much needed.

However, for listed companies, material RPTs will continue to require a shareholder special resolution until SEBI amends the listing agreement.
Apart from the shareholder resolution threshold, Ministry of Corporate Affairs and SEBI are polarised on certain other critical RPT issues : definition of a ‘related party’; scope of ‘related party transactions’; trigger/materiality thresholds of RPTs; RPT exclusion list. The sooner Ministry of Corporate Affairs and SEBI find a balancein their approach to RPTs, the better it will be for India Inc!

 

Damini Marwah

General Counsel and Legal Head for IL&FS Financial Services (IFIN), based in Mumbai.

 


Disclaimer
Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

© Copyright 2015-16. All rights reserved.