Companies Act Amendments: Good News For Promoters?

Published on Sat, Dec 20,2014 | 12:10, Updated at Sat, Dec 20 at 12:10Source : CNBC-TV18

Siemens, United Spirits, Maruti Suzuki- in the last 6 months, minority shareholders have made their voices heard loud and clear- thanks to the new power given to them by the Companies Act, 2013 and SEBI's Clause 49. Maybe too loud and clear for the comfort of promoters! The majority now feels like the minority prompting the government to amend certain related party transaction provisions in the brand new Act. Payaswini Upadhyay reports on the biggest change proposed by the Companies Act Amendment Bill.

In November last year, Siemens India proposed to sell the company's Metals Technologies Business to its German parent. Since the proposal was a related party transaction, it required approval of minority shareholders, via a special resolution. The minority shareholders rejected the offer price as low. Consequently, Siemens Germany revised the offer price from Rs 857.2 crore to Rs 1,023.27 crore.

In the case of United Spirits, last month minority shareholders rejected as many as 9 related party transcations with Mallya entities.

Just last week, Maruti reportedly decided to postpone seeking shareholder approval for its Gujarat plant. Maruti proposes to allow its parent Suzuki to build the plant – a proposal that has been opposed by investors and proxy advisory firms ever since Maruti first announced it.

- The wait may be worth Maruti's while. This week, the Lok Sabha passed an amendment to Section 188 of the Companies Act which requires related party transactions to be approved by 75% of unrelated shareholders, present and voting. Once amended, the special resolution will be replaced by an ordinary resolution – that is, a resolution requiring approval from more than 50% unrelated shareholders present and voting.

Amit Tandon
Managing Director, IiAS
"With a lower threshold, what we believe is, that some of the dialogue and some of the information which is going to the shareholders might just come down which is not a good sign. You're not asking companies to give confidential information or something which is going to impact them strategically. But certainly, if you are selling a business, the shareholder is entitled to know what the turnover of the business is – whether it is profitable or not. You just cannot say this is the business we've decided is not core to us and we're selling it. By way of an example, few weeks back United Spirits had special resolution for doing certain RPTs with Diageo. You look at the resolution which was proposed the last time and which was hosted by the website just yesterday- certainly there is difference in the kind and quality of information."

Bharat Vasani
Group General Counsel, Tata Group
"I have a slightly different view on the matter. If you look at Siemens' case, a shareholder holding 2.5% of the shareholding could block the corporate restructuring scheme. The concern I have is that if you keep special resolution, I have seen instances where a very small group of shareholders holding 2-3% is able to block the resolution because not all shareholders vote on postal ballot in shareholder meetings or by E-voting. So ideally I would like to see the law that those shareholders who did not vote shall be deemed to have given their consent otherwise you will have this problem of small group blocking the entire scheme. I don't see it is a vey significant dilution. Again 51% approval is of minority shareholders; not of promoter group."

Even if the Companies Act gets amended, listed companies will not be able to avail the benefits of a less stringent threshold. And that's because Clause 49 of the Listing Agreement currently mandates a special resolution for material transactions, in which only un-related party shareholders are permitted to vote. SEBI defines material as transactions exceeding 10% of annual turnover. It's not clear if SEBI will align its Clause 49 with the company law amendment or retain a higher threshold. If it chooses to align, that may mean fewer number of transactions going to the shareholders for approval.

Sandip Bhagat
Partner, S&R Associates
"You're right- That may mean that lesser number of transactions are going to minority shareholders under the listing agreement but again, I think, the difference between 5% and 10%- it will cover most of the transactions somebody is trying to cover. The threshold at which those transactions get approved, the proposed Bill says ordinary resolution of the minority; the listing agreement says special resolution of the minority. And I think those will have to probably sync with each other.

(SEBI's April Circular: Defined 'material' as transactions exceeding 5% of annual turnover. Later amended to 10% of annual turnover)

Amit Tandon
Managing Director, IiAS
"Having got used to the 75% threshold, I am not going to happy about a rollback. If we hadn't gone to a special resolution threshold and said we need majority of minority investors, I guess 6 months back we would have taken it. At this stage we find it difficult primarily because I do expect it's going to impact the information flow. I also expect that there isn't going to be a dilution as far as interested party is concerned."

Bharat Vasani
Group General Counsel, Tata Group
"If you completely prevent all the related parties from voting, there may be situations of a joint venture where one shareholder is interested and other is not interested but both are related parties and you prevent the other shareholder from voting- there won't be anybody else because this is a two party joint venture. So I think we need to provide certain carve outs if you're going to provide that all related parties should not vote."

Two other amendments pertaining to related party transactions align the Companies Act with Clause 49. The first one allows Audit Committees to grant an omnibus approval for RPTs and the second one exempts related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related shareholders. Experts say the second amendment is prone to abuse.

Sai Venkateshwaran
Partner & Head- Accounting Advisory Services, KPMG
"The audit committee being empowered to give an omnibus approval- so this is an area where the act is now getting aligned to Clause 49 and in fact both Clause 49 & the Act is now codified. What has emerged to be the practice in some of the corporates -because to get a pre-approval for every single transaction would have been a challenge, therefore corporates are essentially putting together routine transactions into one bunch and based on each counter party, they were documenting what is the transaction price, the methodology, the rationale for the transaction, getting an omnibus approval starting to comply with the rigorous requirements and in a way both Clause 49 & now this amendment has now codified that practice into the law itself, so that's a good change that's come through."

Amit Tandon
Managing Director, IiAS
"One of the observations we've had over the last 12-18 months is that companies have started using their 100% subsidiaries to push through transactions. So one which gained a lot of attention was when Cairn Energy gave money to a group company. The way it was routed was that money was transferred to a 100% subsidiary and the 100% subsidiary then lent to the group company. The approval the 100% subsidiary took was from the parent and not from its shareholders. The point I am making at this stage is that it can be abused – that is what we need to watch out for."

Sandip Bhagat
Partner, S&R Associates
"I think the wholly owned subsidiary does not have a minority shareholder to worry about. You're really talking about is the minority shareholder of the holding company suffering. And I think the answer to that is if it's a wholly owned subsidiary, then the entire benefits are flowing in to the minority shareholders of the holding company. I don't think it's an issue. This just makes life easier for corporate India without compromising the basic principle which is protection of minority."

Shareholder activists are hoping that SEBI maintains a higher threshold for RPT approval under Clause 49. Besides RPT, most others changes in the Companies Act Amendment Bill seek to iron out procedural issues and facilitate ease of doing business. But one more amendment merits special mention and that is reporting of fraud by auditors. The earlier provisions required all frauds to be reported to the Central government. The amended Section requires reporting of only material frauds to the government. All frauds below the prescribed threshold now need to be reported only to the Audit Committee and disclosed in the Board's report.