Institutional Investor Advisory Services India Limited (IiAS) has said that many Indian companies are disregarding the boundaries imposed on related party transactions brought in by new SEBI norms brought in over the last few years by passing vague enabling resolutions.
IiAS is India’s leading proxy advisory firm and offers voting recommendations on shareholder resolutions. It also provides independent opinion and data on corp orate governance issues.
“While the regulations regarding related party transactions have changed to balance the ease of doing business, with the need to protect minority shareholders, companies have been disregarding the intended boundaries. They are presenting shareholders with ‘enabling resolutions’ that are sufficiently vague and opaque to provide literally no material information to shareholders,” it said.
As SEBI and the Ministry of Corporate Affairs (MCA) continue to debate the alignment of regulations on related party transactions, some companies seem to show their own irk of having to take shareholder approval through the quality of the resolutions they have presented in 2015, it added.
Institutional investors are wary of related party transactions – more importantly, the opacity surrounding them. That does not mean that related party transactions should not be undertaken at all – only that shareholders should be comfortable with it, said IiAS.
“Therefore, instead of attempting to get around the requirements, companies should disclose more and build trust and comfort with investors. Presenting shareholders with ambiguous resolutions comes with the implied expectation that either shareholders are not discerning or that they must approve transactions in ‘good faith’. That is disrespectful to shareholders,” it said.
It gave examples of cases where it had urged investors to vote against such resolutions. One such example was of Goodyear India.
“The company does business with Goodyear South Asia Tyres Private Limited (GSA, a fellow subsidiary) on a regular basis. Its last contract was signed in 2014, and because this is a continuing transactional relationship between the two companies, it needed shareholder approval under Clause 49 of the Listing Agreement. The resolution provides no details other than that the transactions need to be undertaken and must be approved – the resolution does not provide any quantum or value of the proposed transactions, nor a period for which the approval is being sought.
“The company said in its notice that at that stage, it was “not possible to ascertain the monetary value of the transactions that may be undertaken pursuant to the said Contract during any financial year” and that “an approval of shareholders is being sought in order to ensure compliance with revised Clause 49”.”
Beyond the largely ambiguous resolutions, companies have also been presenting ‘enabling resolutions’ – these type of resolutions allow companies room to undertake transactions but within a given boundary.
IL&FS Transportation Networks Limited (ITNL), however, has taken this ‘enabling resolution’ to a new level, it said.
“The company has presented a resolution to shareholders that allows it to undertake transactions aggregating Rs.100 billion every year with related parties that currently exist and those that may be formed in the future.”