The Securities and Exchange Board of India (Sebi) has proposed
to suitably amend a portion of Clause 166 of the Companies Bill,
2009, disallowing interested shareholders from voting on special
resolutions required for related-party transaction. Sebi made this
recommendation to the ministry of corporate affairs following its
board meeting on February 7. The recommendation is based on the
investigation conducted into the Satyam scam and was made with the
objective to protect small and diversified shareholders in listed
companies from abusive related-party transactions. This is not the
first time Sebi is moving to disallow interested shareholders from
voting on resolutions. For instance, Sebi regulations allow
delisting only if the votes cast by the 'public
shareholders' (which excludes promoters) in favour of delisting
are at least twice the number of votes cast by 'public
shareholders' against it.
In effect, the shareholding power of the interested promoter
shareholders will not be sufficient to implement the decision of
delisting. Now, Sebi is recommending that this principle be
extended even to related party transactions. Broadly, Clause 166
states that the consent of the board of directors has to be sought
before any contract or arrangement with a related party is executed
on certain kinds of transactions listed under the clause. Some of
the transactions are sale, purchase or supply of goods or materials
, disposing or buying properties, leasing of property, availing or
providing services, etc. The clause goes on to add that
shareholders consent by way of special resolution (3/4th majority)
will be required for these related party transactions if the
company's paid-up capital or the transaction value of the
related party contracts exceeds a prescribed amount.
However, Clause 166 exempts those contracts that are in the
ordinary course of business and are executed at 'arm's
length' basis. Therefore shareholders approval will be required
only when related party contracts are not in the ordinary course or
when the company's capital or the transaction value of such
contracts exceeds a certain amount. It is this portion of the
clause that the Sebi is seeking to amend by disallowing interested
shareholders from voting. Sebi assumes that by debarring the
interested shareholders, a fair and an impartial resolution will be
passed on that contract and that will protect the small and
Under the existing Companies Act, 1956, directors of public limited
companies are not permitted to vote in situations where there is
conflict of interest i.e., on those contracts or arrangements in
that they are directly and indirectly interested. Not only this,
their presence is not counted to determine quorum for discussion on
those contracts and arrangements . Further, the Act also requires
directors to disclose their nature of interest in contracts and
arrangements in which they are interested. These obligations are
rightly imposed on the directors because they have fiduciary duties
towards the company. As far as the shareholders are concerned , it
is a settled principle in Indian jurisprudence that unlike
directors , a shareholder is entitled to consider his own interest
without regard to the interest of other shareholders and does not
owe any fiduciary duty. Hence, they are free to exercise their
voting power in any manner they wish that may or may not be in the
interest of the company or the fellow shareholders.
Sebi's recommendation to cast an obligation on the
shareholders not to vote in situations of conflict of interest will
be a major departure from the existing position under the Companies
Act. Minority shareholders will, however , be delighted and will
welcome this change as it will protect their interests from an
interested majority shareholder who is armoured with sufficient
shareholding to have the resolution passed to its advantage. Such a
proposal, if implemented, will stop the interested shareholder
right at the time when voting on a matter takes place, instead of
the prejudiced minority later seeking relief under the oppression
and mismanagement provisions of the Companies Act. This is just a
beginning and only a recommendation.
It is not known what favour it will find with the ministry of
corporate affairs and whether at all it will finally find a place
in the new Company Act - which itself has been waiting for an
extremely long to see the light of the day. Further, a lot of
deliberations will be required if at all this recommendation has to
be finally implemented, including determination of what constitutes
an "interested shareholder" and "related party
transaction" , exemptions , etc, in cases of certain related
party transactions. For now, one can wait and watch.
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guide to the subject matter. Specialist advice should be sought
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The Ministry of Corporate Affairs notified on June 5, 2015 that certain provisions of the Companies Act, 2013 shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification.
Whilst trade and barter have existed since early times, the modern practice of forming business relationships through the means of contract has come into existence only since the industrial revolution in the West.
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