Related Party Transaction: 6 things investors should watch out for

Companies are presenting shareholders with ‘enabling resolutions’ that are vague and opaque to provide literally no material information to investors, says IiAS in an advisory


As the market regulator 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. Companies are presenting shareholders with ‘enabling resolutions’ that are sufficiently vague and opaque to provide literally no material information to shareholders, says proxy advisory firm Institutional Investor Advisory Services India Ltd (IiAS) in an advisory.
According to IiAS, 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. 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. The regulation is attempting to achieve just that, in asking companies to get shareholder approval, it said. 
"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," IiAS added. 
Citing some examples, the proxy advisory firm said, Goodyear India Ltd (Goodyear India) in its 2015 Annual General Meeting (AGM) presented a related party transaction. 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 provided 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 in its notice had said 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”. 
"But most companies make business plans – this is an essential requirement for planning and fund-raising. Surely, the company could have put up a transaction value and a period, even if these were buffered. Moreover, the company did not provide a copy of the contractual agreement between Goodyear India and GSA. Shareholders were required to visit the company’s registered office to see the agreement. In this day and age of electronic communication, the company could have made it easier for shareholders to access such information," IiAS said.
The proxy advisory firm recommended voting against Goodyear India’s related party transaction resolution because of its 'opacity'. It said, "shareholders do not know what they are voting on. The resolution was tantamount to allowing the company to do as it sees fit for as long as it wishes. Institutional investors raised concerns over this resolution with the company. Only after reviewing the base contract between the two companies, and then being satisfied that any subsequent change in the base agreement would be made with the concurrence of the majority of minority shareholders, did they decide to vote in favour of the resolution," IiAS added.
According to IiAS, a similar resolution was presented by the Automobile Corporation of Goa Ltd (ACGL). The company presented shareholders with a resolution to undertake transactions with Tata Motors Ltd, a 47% shareholder of the company and a key customer (Tata Motors contributed to almost 90% of ACGL’s FY15 revenues).
"While the need to undertake transactions with Tata Motors was evident given its criticality, the company presented shareholders with an opaque resolution, which carried neither a transaction amount nor the transaction period. Moreover, the nature of transactions described in the resolution was all encompassing. Once again, the company was asking shareholders to approve the resolution on blind faith. There was no information by which shareholders could make an informed decision, or even arrive at a best guess of what they were voting on," the proxy advisory firm said.
IiAS said it raised this concern with ACGL’s management. Following several rounds of discussion, ACGL’s management confirmed that they will consider this approval to be valid only for three years and that they will present the transaction once again to shareholders for an approval in FY18. This provided the investors a chance to review the transactions with Tata Motors on a periodic basis. IiAS then recommended voting for this resolution.
According to IiAS, 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 Ltd (ITNL), however, has taken this ‘enabling resolution’ to a new level – it is virtually asking for a ‘blanket approval’. The company has presented a resolution to shareholders that allows it to undertake transactions aggregating Rs100 billion every year with related parties that currently exist and those that may be formed in the future. Given the nature of business, ITNL needs to support its project special purpose vehicles (SPVs) but the proposed annual limit of Rs.100 billion is extremely high given that ITNL has undertaken only a handful of projects that individually aggregate Rs100 billion and over in total project cost. 
"Moreover, how do shareholders approve transactions with related parties that are yet to be formed? Should the company not approach shareholders for an approval as and when required? Undeniably, companies need the flexibility to operate, and therefore may ask for limits that accommodate potential exigencies, but approving a resolution of this nature would virtually obviate seeking shareholder approval in future,” IiAS said while recommending voting against this resolution.
Here are six points presented by IiAS for investors to watch out for related party transactions of companies...



Vijay Kapur

2 years ago

Good but whether regulators are listening

Probe begins into payment evasion at Thiruvananthapuram airport

The Thiruvananthapuram unit of the CBI has met officials of all the international airlines besides national carrier Air India and has got a detailed statement of the ground handling charges that they have paid to the ground handling agencies since 2012


The Central Bureau of Investigation (CBI) has begun a preliminary probe into the alleged evasion of royalty payments the ground handling agencies pay to the Airports Authority of India.
The Thiruvananthapuram unit of the CBI has met officials of all the international airlines besides national carrier Air India and has got a detailed statement of the ground handling charges that they have paid to the ground handling agencies since 2012.
At present, there are two ground handling agencies that operate in the international airport here. 
Speaking to IANS, an official of an international airline said on Wednesday that the CBI had asked them for a statement on the ground handling charges that they have paid since 2012. 
"Not only have we given, all other international airlines have also given their list," said the airline official who did not wish to be identified. 


Master plan for Patna to be unveiled soon

Chief Minister Nitish Kumar roped in the Centre for Environment Planning and Technology, Ahmedabad, in 2011 to prepare the master plan


A masterplan to develop Bihar's capital Patna as a metropolitan city is likely to be unveiled soon after a wait of over 30 years, an official said on Wednesday.
The move comes ahead of the upcoming state polls.
"The state planning and development board has approved the master plan for Patna, Urban Development Department's Principal Secretary Amrit Lal Meena said.
"Patna's draft master plan will be sent to the state cabinet probably next week for its final approval," he added.
Last year, Patna's draft master plan was put in the public domain for suggestions and objections from the over two million residents after the state cabinet declared the "plan area" in the proposed master plan for Patna.
Meena said the city would be spread over 1,167 sq. km against the existing 250 sq km. Over 600 sq. km area has been marked as urban area, which includes setting up of two satellite towns to cater to urbanisation and population growth in the next two decades.
The city will have an area of over 400 sq. km marked as green cover. It has been proposed that over 16 percent of the total area will be used for roads.
Chief Minister Nitish Kumar roped in the Centre for Environment Planning and Technology, Ahmedabad, in 2011 to prepare the master plan.
The last master plan for Patna (1961-1981) ended 34 years ago. Though a master plan was prepared for the period 1981-2001, it did not have the formal approval of the state government.


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