SEBI’s recommendation on related party transactions

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Press release PR No.24/2011 dated 7 February 2011 issued by SEBI

Securities and Exchange Board of India [SEBI] at their Board Meeting held on 7 February 2011 decided to recommend to the Ministry of Corporate Affairs, Government of India [MCA] to suitably amend Clause 166 of the Companies Bill, 2009 [Companies Bill], to disallow interested shareholders from voting on the special resolution of the prescribed related party transaction. SEBI move is aimed to protect small and diversified shareholders in listed companies from abusive related party transactions.

As per Clause 166 of the Companies Bill, the Board of Directors of a company is required to approve specified related party transactions. In case of companies having specified capital, such related party transactions which are not on an arm’s length basis would require prior approval of shareholders by a special resolution. Specified related party transactions shall include any contract or arrangement with a related party with respect to—

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agents for purchase or sale of goods, materials, services or property;

(f) appointment to any office or place of profit in the company or its subsidiary company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company.

SEBI has already mandated non-participation in voting in the shareholders meeting by interested shareholders in the following cases:

• In case of issue of sweat equity shares to promoters under SEBI (Issue of Sweat Equity) Regulations, 2002, for obtaining shareholders’ approval by special resolution, the promoters to whom Sweat Equity Shares are proposed to be issued cannot participate in voting.

• In case of voluntary delisting under SEBI (Delisting of Equity Shares) Regulations, 2009, the special resolution for seeking shareholders’ approval is considered to be approved, if the votes cast in favour of the proposal by public shareholders is at least two times the number of votes cast against it.

Conclusion

• The related party transactions which are not on an arm’s length basis in case of listed companies will be subject to a greater scrutiny from non-interested shareholders if the proposal is accepted by the MCA.