[The following post is
contributed by The following post is contributed by Nivedita Shankar, who is a Senior Associate at Vinod Kothari &
Co. She can be reached at nivedita@vinodkothari.com.
contributed by The following post is contributed by Nivedita Shankar, who is a Senior Associate at Vinod Kothari &
Co. She can be reached at nivedita@vinodkothari.com.
The views expressed herein are
solely those of the guest author and cannot be ascribed to the other
contributors of this Blog.
solely those of the guest author and cannot be ascribed to the other
contributors of this Blog.
This is a continuation from the previous
post in this series]
post in this series]
Precedents around the world
United States
Clause 314 of NYSE Listed Company
Manual considers the Audit Committee as an appropriate forum to review a
related party transaction. The Exchange also reviews proxy statements and other
SEC filings, disclosing RPTs and where such situations continue year after
year, the Exchange after evaluation also determines whether such RPTs should be
permitted to continue.
Manual considers the Audit Committee as an appropriate forum to review a
related party transaction. The Exchange also reviews proxy statements and other
SEC filings, disclosing RPTs and where such situations continue year after
year, the Exchange after evaluation also determines whether such RPTs should be
permitted to continue.
Under Regulation S-K of U.S.
Securities Law, Item 404 requires public companies to disclose transactions
involving amounts of more than USD1,20,000/- in which the related person is or
has had direct or indirect material interest.
Securities Law, Item 404 requires public companies to disclose transactions
involving amounts of more than USD1,20,000/- in which the related person is or
has had direct or indirect material interest.
United
Kingdom
Kingdom
Financial Reporting Standard-8
require companies to make adequate disclosures in their financial statements to
draw attention to the possibility that the reported financial position and
results may have been affected by the existence of related parties and by material transactions with them. Further,
under the Companies Act, 2006, members’ approval is required for any
transaction with the director or if the director is connected in such
transaction.
require companies to make adequate disclosures in their financial statements to
draw attention to the possibility that the reported financial position and
results may have been affected by the existence of related parties and by material transactions with them. Further,
under the Companies Act, 2006, members’ approval is required for any
transaction with the director or if the director is connected in such
transaction.
Hong Kong
Rule 14A of Listing Rules of the
exchange in Hong Kong requires companies to take prior approval of shareholders
in case of connected transactions. Any connected person with material interest
shall not be permitted to vote at the meeting on the resolution approving the
transaction. The manual further requires that the Independent Board Committee
of the company should appoint a financial adviser to advise the company’s
shareholders about whether the terms of the connected party transactions are
fair and reasonable and in the interest of the company and the shareholders as
a whole.
exchange in Hong Kong requires companies to take prior approval of shareholders
in case of connected transactions. Any connected person with material interest
shall not be permitted to vote at the meeting on the resolution approving the
transaction. The manual further requires that the Independent Board Committee
of the company should appoint a financial adviser to advise the company’s
shareholders about whether the terms of the connected party transactions are
fair and reasonable and in the interest of the company and the shareholders as
a whole.
Singapore
The Singapore Exchange Listing
Manual requires only disinterested shareholders to vote on any transaction
involving interested person. “Interested
Person” has been defined to mean a director, CEO or controlling shareholder and
an associate of any of these.
Manual requires only disinterested shareholders to vote on any transaction
involving interested person. “Interested
Person” has been defined to mean a director, CEO or controlling shareholder and
an associate of any of these.
Malaysia
The Bursa Malaysia Listing
Requirements lay down provisions similar to Hong Kong. Rule 10.08 requires
disclosure in case of a related party transaction to the Exchange where the
value of the consideration is less than RM 2,50,000 or is a recurrent related
party transaction, where the percentage ratio is 0.25% or more. Where any one
of the percentage ratios[1]
of a related party is 25% or more the company must appoint a Principal Adviser
to ensure that such transaction is carried out on fair and reasonable terms and
conditions and not to the detriment of the minority shareholders. The stated
Requirement debars any interested director from taking part in board
deliberations and abstain from voting on such related party transactions.
Further, any interested director or major shareholder must ensure that
connected persons abstain from voting on such related party resolutions in the
general meeting.
Requirements lay down provisions similar to Hong Kong. Rule 10.08 requires
disclosure in case of a related party transaction to the Exchange where the
value of the consideration is less than RM 2,50,000 or is a recurrent related
party transaction, where the percentage ratio is 0.25% or more. Where any one
of the percentage ratios[1]
of a related party is 25% or more the company must appoint a Principal Adviser
to ensure that such transaction is carried out on fair and reasonable terms and
conditions and not to the detriment of the minority shareholders. The stated
Requirement debars any interested director from taking part in board
deliberations and abstain from voting on such related party transactions.
Further, any interested director or major shareholder must ensure that
connected persons abstain from voting on such related party resolutions in the
general meeting.
Section 188 of Act, 2013 on the
same lines as other countries across the world prohibits interested
shareholders from voting on related party transactions. The concept of
appointing an independent financial adviser for such transactions has not been
mandated yet.
same lines as other countries across the world prohibits interested
shareholders from voting on related party transactions. The concept of
appointing an independent financial adviser for such transactions has not been
mandated yet.
Conclusion
What is noticeable is that around
the world, including India, RPTs have been given due importance and a lot of thought
has gone into preventing such transactions from affecting the business of the
company. This thought process has also made the minority or disinterested
shareholders an active part of the business of the company. But in the process,
the corporate balance has also tilted towards the minority which cannot be good
news.
the world, including India, RPTs have been given due importance and a lot of thought
has gone into preventing such transactions from affecting the business of the
company. This thought process has also made the minority or disinterested
shareholders an active part of the business of the company. But in the process,
the corporate balance has also tilted towards the minority which cannot be good
news.
It is similar to a hung
parliament where two or three parties which have enough of a majority to block a particular agenda make not
only the ruling party succumb to their pressure, but also bring the parliament
to a stand still. In effect this leads to instability in the functioning of the
parliament.
parliament where two or three parties which have enough of a majority to block a particular agenda make not
only the ruling party succumb to their pressure, but also bring the parliament
to a stand still. In effect this leads to instability in the functioning of the
parliament.
A similar situation can be
envisaged if the power balance is in the hands of the minority in a company. In
this age when the corporates are governed by the corporate laws, provision like
section 188 of Act, 2013 have the potential to make every power block to swing
making it impossible for companies to function.
envisaged if the power balance is in the hands of the minority in a company. In
this age when the corporates are governed by the corporate laws, provision like
section 188 of Act, 2013 have the potential to make every power block to swing
making it impossible for companies to function.
(Concluded)
– Nivedita
Shankar
[1] “Percentage ratios” as per Bursa Malaysia Listing Requirements has
been defined in Rule 10.02 and is calculated on the basis of various parameters
like value of assets, net profits attributable to the transaction, aggregate
value of consideration given or received, equity share capital issued by listed
issuer as consideration for an acquisition, total assets forming subject matter
of transaction etc, compared with the same parameters as that of the listed
issuer.
been defined in Rule 10.02 and is calculated on the basis of various parameters
like value of assets, net profits attributable to the transaction, aggregate
value of consideration given or received, equity share capital issued by listed
issuer as consideration for an acquisition, total assets forming subject matter
of transaction etc, compared with the same parameters as that of the listed
issuer.