Cos May Need Shareholders Nod to Divest Stake in Major Subsidiaries

Companies may have to take shareholders approval to divest their stake in major subsidiaries domestic or foreign as market regulator Sebi wants corporate divestments involving related-party transactions to be vetted by stakeholders,said two persons close to the development.Companies may also have to disclose the financial performance of their subsidiaries,benefits from sale,consideration amount and the names of the parties involved.Sebi also plans to mandate companies to disclose their policies on related-party transactions similar to an audit charter.According to current rules,divestment of major subsidiaries does not require shareholders approval.But Sebi has come across instances of abusive related-party transactions,where ownership of major subsidiaries were transferred to controlling shareholders without the other shareholders approval.It had also observed that controlling shareholders sold the subsidiaries without proper valuation to companies indirectly owned by them.To plug this gap,Sebi plans to insert new provisions in the listing agreement mandating companies to obtain shareholders approval through a special resolution for selling shares in subsidiaries,especially those that are material in nature.The draft companies rules define materiality at 5% of the turnover or 20% of the net worth,whichever is higher.Related-party transactions,along with insider trading,are the two major ills affecting our markets, said Prithvi Haldea,chairman of Prime Database,a New Delhibased capital markets research firm.Sebi also wants all major related-party transactions to be approved by majority of the minority shareholders to prevent abusive transactions.Sebi is of the view that since promoters hold majority stake,they have sufficient numbers to clear a transaction,so such deals are easily struck between the group companies.Majority shareholders should not be allowed to gain any undue benefit at the expense of minority shareholders, Haldea said.Listed companies may have to develop a disclosure framework for related-party transactions in which they will have to spell out whats related-party transaction,its materiality and whether it is done at arm's length.They will also have to specify that the company wouldnt enter into any other transaction apart from the ones covered in the policy.The regulator also plans to make it compulsory for companies to disclose material related-party transactions on a real-time basis to stock exchanges,including vital details of the transaction entered into,as it feels this will align rules to global practices.Companies are now required to disclose related-party transactions to bourses only on an annual basis.Sebi feels this restricts the effectiveness of the disclosure as information reaches investors much after the deals are done.When you sell a business,you have to disclose who the buyer is,what price will be earned,etc.Exactly the same disclosure is intended to apply to sale of subsidiaries, said Vivek Gupta,partner of BMR Advisors.The regulator also plans to mandate companies to get material related party transactions approved by audit committee and also refer such deals for third party valuations.Sebi contends that shareholders will be able to take a well-informed decision on transactions between related parties if companies enclose the third party valuation report along with the notice.Currently,the audit committee reviews related party transactions on a periodic basis after such deals have taken place.These reviews are of scant help as the transaction cannot be reversed even if the committee gives a negative report.The regulator now plans to correct this by making pre-approval by audit committee of major related party transactions and resructuring proposals compulsory.

Economic Times, New Delhi, 06-12-2013