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...
 
 
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COMMENTS

Vijay Kapur

4 years ago

Good but whether regulators are listening

HC dismisses Ola cabs' plea against ban

On January 1, the Delhi government had banned the operation of app-based cab services till they complied with the guidelines of the Radio Taxi Scheme of 2006 which was amended on December 26, 2014

 

The Delhi High Court on Tuesday dismissed app-based cab service provider Ola's plea against a single judge's order asking the Delhi government to "strictly enforce" the ban imposed by it on January 1.
 
A division bench of Chief Justice G Rohini and Justice Jayant Nath dismissed the plea filed by Ola cabs challenging a single judge's July 29 order that directed the Delhi government and traffic police to enforce the ban order issued on January 1 on radio cab services not registered under the radio taxi scheme and running on diesel.
 
On January 1, the Delhi government had banned the operation of app-based cab services till they complied with the guidelines of the Radio Taxi Scheme of 2006 which was amended on December 26, 2014.
 
The company had told the bench earlier that the single judge had overlooked the Supreme Court's orders on the kind of taxis that can run on the city's roads. 
 
The company's counsel had said that the Supreme Court had clarified it has not prohibited running of taxis that are Euro II compliant or follow even better emission standards and it has not ordered conversion to CNG.
 
The apex court had only imposed a restriction with regard to the age of vehicles as it said no 15-year-old commercial vehicles shall run in Delhi and not with regard to fuel used by them, the company said.

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Government moves bill to make bribe-giving an offence
Amid ruckus and disruptions in the Rajya Sabha, the government on Thursday moved a bill to amend the Prevention of Corruption Act making the giving of bribe also a crime along with receiving it.
 
The bill, introduced in the Rajya Sabha in 2013 and subsequently sent to a parliamentary panel, makes giving a bribe a specific offence.
 
It also covers retired public servants, but one controversial clause pertains to a provision requiring prior sanction to prosecute serving and former public officials.
 
"The government is committed to bring in more transparency and accountability in governance and to live by its pledge of maximum governance, minimum government," Minister of State in the Prime Minister's Office, Jitendra Singh, said while moving the bill.
 
"There are, in the amendments, certain measures which would disincentive bribe-giving and bring into the ambit of accountability and answerability the bribe-giver as well," he said.
 
"At the same time, it also envisages certain amendments that ensure that an honest and upright officer does not suffer from any intimidation or loss of initiative for which we are going to make certain amendments to enlarge the ambit of permission for initiating proceedings against an officer to all levels, regardless of his status, and similarly to also introduce procedure for seeking permission for prosecution of an officer even after he has superannuated," he said.
 
The bill, however, could not be taken up for discussion as the opposition created a ruckus, and said the bill cannot be discussed till the house was in order.

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COMMENTS

Ralph Rau

4 years ago

If the government is serious about introducing such a bill it should be announced well in advance and put in the public domain for consultation.

The answer to prevention of corruption is TRANSPARENCY. Specifications should be standardised so that competition is only on rates and not on specifcations.Quotes should be visible on the web.

What about the role of agents and middlemen when bribes flow indirectly and not directly ?

Dahyabhai S Patel

4 years ago

Bribe giving must be an offence, but it must be considered offence for the bribe giver and the person supposed to take/who has taken bribe must be punished and made to pay as fine at least 100 times the amount of the bribe, as the government official is paid his salary from the people's tax for the work he is supposed to do faithfully and in time. In case of urgency, extra money should be paid officially, not as bribe!!!!

manoharlalsharma

4 years ago

Government moves bill to make bribe-giving an offence/I wish to ask through u r organisation then what will u do in NEED of an URGENCY will u die or to PAY & SAVE U R LIFE ? and if u complain to any of the CENTRAL/STATE department u will have find FIRST IRRESPONSIBLE BABUS because NO CM or PM have time to devote in u r difficult time.

Dahyabhai S Patel

4 years ago

Further, there must be a well displayed procedure for applying for any service along with documents to be supplied (there must be no need of wasting papers for the documents as attachments/enclosures which are already with government; reference must be sufficient ) and time taken for the job to be completed.The applicant must be helped to file it properly and the document asked must be delivered at applicant's address by post saving time and fuel for transport conveyance. If the job is not done in time, the official must be severely punished and pay from his pocket.

Dahyabhai S Patel

4 years ago

I do not know exactly about the bill. The law must be enacted such that if any government official asks for the bribe or does not do his duty or prolong the job in order to extract money as bribe from Aam Aadmi, he must be punished, rather fired from his services. No body likes to give bribe. If asked for the bribe, it must be sufficient for Aam Aadmi to complaint about the official and onus of proving the complaint must be on government office bearer. If it is proved against Aam Aadmi, the latter must be punished to maximum,

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