MCA NUDGE TO TWEAK RULES ON RELATED PARTY TRANSACTIONS Govt Push May Put Sebi in a Spot

TOUGH TIMES Market participants to appeal to Sebi against relaxing its stand on protecting minority shareholders

The Securities and Exchange Board of India (Sebi) may find itself on a tricky terrain over the government's nudge to change rules on related party transactions in corporates.

In a move towards promoting ease of doing business, the ministry of corporate affairs (MCA) has asked the regulator to tweak rules to make them at par with those under the Companies Act 2013. This has raised concerns among market participants about a dilution in Sebi's stand on protection of minority shareholders. Experts and shareholder advisory firms, which believe Sebi should hold its ground on the issue, will soon take up the matter with the regulator.The MCA changed its stand on related party transactions in 2014, when it lowered the threshold for minority shareholder votes for listed companies from 75% to 50% for passing resolutions. It also allowed voting by `related parties' while barring only interested parties'.

“MCA's goal is to improve the ease of doing business while Sebi is for protecting investors. Therefore, while MCA can dilute its stance on related party transactions, Sebi will be better served in not doing so,“ said a report by IiAS, a proxy advisory firm. “Preventing interested parties, but allowing related parties to vote takes away all meaning. Most promoters hold stake through a series of entities (companies, trusts, and partnerships) that is spread across a catalogue of family members. Thus, with the amendment of the Companies Act 2013, the family and promoter entities not directly involved in the transaction can vote on it since they may not be interested parties. This cuts the power of minority shareholders at the knees. Promoters will likely manipulate their holding structure to get their way and minority shareholders may be unable to block unfair transactions,“ said IiAS.

Most of the times there is ambiguity regarding the kind of transactions that would be put to vote. The Companies Act 2013 states that transactions in the ordinary course of business that are done at an arm's length does not require any shareholder approval. But, how do companies define `ordinary course of businesses is a question that experts are now raising. The new Companies Act neither provides a definition nor does it give any framework for defining transaction that can be kept at an arm's length.

“Jurisprudence shows that Sebi can set higher standards for listed companies. Therefore, the regulator should not dilute its stand as it would be a loss for minority shareholders,“ said Sandeep Parekh, founder, Finsec Law Advisors. “A dichotomy does not seem to exist between related party and interested party . Any kind of related party is interest party in most transactions. Hence, there should be no debate on this.“ An IiAS study showed that only 9 out of the top 30 S&P BSE Sensex companies had attempted to define ordinary course of business with regard to related party transactions. Sebi's method for defining related party transactions that may come for vote is much clear: all transactions that account for more than 10% of company's turnover need to be put to vote.

Few companies have designed long flow charts to help their internal teams and board members decide if a transaction needs board or shareholder approval. Such complexity is unnecessary and an alignment of regulations is imperative -in the interest of minority shareholders. “In the interest of minority shareholders, the Companies Act 2013 needs to align itself to SEBI's Clause 49 requirements for listed companies,“ said the IiAS report.

According to Tejesh Chitlangi, Partner at IC Legal, “There are precedents wherein Sebi has aligned its provisions with the new Companies Act -for instance, permitting the pre-emptive rights in shareholders agreements in line with the new companies' law provisions. Since any conflicting provisions cause uncertainty and practical difficulties, the same need to be harmonised. Sebi laws are likely to be more weighed towards investors, but the same may not continue to be conflicting with any company law provisions and hence should be appropriately modified to the extent warranted.“

The Economic Times, New Delhi, 11th July 2015

Household debt up, but India still lags emerging-market economies: RBI

Although household debt in India is rising, driven by increased borrowing from the financial sector, it remains lower than in other emerging-market economies (EMEs), the Reserve Bank of India (RBI) said in its Financial Stability Report. It added that non-housing retail loans, largely taken for consumption, accounted for 55 per cent of total household debt.As of December 2024, India’s household debt-to-gross domestic product ratio stood at 41.9 per cent. “...Non-housing retail loans, which are mostly used for consumption purposes, formed 54.9 per cent of total household debt as of March 2025 and 25.7 per cent of disposable income as of March 2024. Moreover, the share of these loans has been growing consistently over the years, and their growth has outpaced that of both housing loans and agriculture and business loans,” the RBI said in its report.Housing loans, by contrast, made up 29 per cent of household debt, and their growth has remained steady. However, disaggregated data sho...

External spillovers likely to hit India's financial system: RBI report

While India’s growth remains insulated from global headwinds mainly due to buoyant domestic demand, the domestic financial system could, however, be impacted by external spillovers, the Reserve Bank of India (RBI) said in its half yearly Financial Stability Report published on Monday.Furthermore, the rising global trade disputes and intensifying geopolitical hostilities could negatively impact the domestic growth outlook and reduce the demand for bank credit, which has decelerated sharply. “Moreover, it could also lead to increased risk aversion among investors and further corrections in domestic equity markets, which despite the recent correction, remain at the high end of their historical range,” the report said.It noted that there is some build-up of stress, primarily in financial markets, on account of global spillovers, which is reflected in the marginal rise in the financial system stress indicator, an indicator of the stress level in the financial system, compared to its p...

Retail inflation cools to a six-year low of 2.82% in May on moderating food prices

New Delhi: Retail inflation in India cooled to its lowest level in over six years in May, helped by a sharp moderation in food prices, according to provisional government data released Thursday.Consumer Price Index (CPI)-based inflation eased to 2.82% year-on-year, down from 3.16% in April and 4.8% in May last year, data from the Ministry of Statistics and Programme Implementation (MoSPI) showed. This marks the fourth consecutive month of sub-4% inflation, the longest such streak in at least five years.The data comes just days after the Reserve Bank of India’s (RBI) Monetary Policy Committee cut the repo rate by 50 basis points to 5.5%, its third straight cut and a cumulative reduction of 100 basis points since the easing cycle began in February. The move signals a possible pivot from inflation control to supporting growth.Food inflation came in at just 0.99% in May, down from 1.78% in April and a sharp decline from 8.69% a year ago.A Mint poll of 15 economists had projected CPI ...

CA Online

Search This Blog