Mumbai: The departing chairman of the Securities and Exchange Board of India (Sebi), C.B. Bhave, proposed changes in key areas related to the capital market, 10 days before the end of his three-year term. In a bid to bring in more transparency in deals between group companies, Sebi will propose that the ministry of corporate affairs tighten norms for all interested parties, including promoters, in such deals.
The market regulator said it will recommend to the ministry the amendment of a clause of the Companies Bill, 2009, to prevent interested shareholders from voting on the special resolution of the prescribed related party transaction. The definition of interested party will cover the promoters of companies, Bhave said, while addressing the last board meeting of his tenure that ends on 17 February.
The board discussed some of the issues that had arisen out of the earnings fraud at Satyam Computer Services Ltd. Investors won’t be allowed to vote on resolutions that involve a conflict of interest.
“The issue arose when Maytas was proposed to be amalgamated with Satyam. Though the transaction did not materialize eventually, the matter originated from there,” said Bhave.
Sebi’s move comes two years after the minority shareholders of India’s then fourth largest software services firm Satyam criticized the company’s poor corporate governance norms on its proposal to buy out majority stakes in two group companies—Maytas Properties and Maytas Infra. Satyam announced the decision to buy the real estate and infrastructure companies managed and controlled by the sons of Satyam’s founder-chairman B. Ramalinga Raju for $1.6 billion (Rs 7,300 crore today) in December 2008. The Raju family held a 35% stake in Maytas Properties and 36% in Maytas Infra. The proposed deal, which was called off later, was to buy out a 100% stake in Maytas Properties for $1.3 billion and a 51% stake in Maytas Infra for $300 million.
The board of Satyam managed to go ahead with a special resolution for the buyout without the consent of minority shareholders, because it was not required by any regulation under the extant companies law.
This was just a month before the accounting fraud came to light.
Sebi’s proposal, if implemented, could bring more transparency in corporate governance and restrict the elbow room available for promoters in leading domestic business groups that have a number of listed companies and make such transactions every now and then.
Adesh Gupta, whole time director and chief financial officer at Grasim Industries Ltd, said the Sebi recommendation could hamper mergers and acquisitions (M&As).
“Ultimately, a merger always benefits shareholders. Unless there is doubt on the integrity of promoters, it will end up creating problems,” he said. “There are so many cases where M&As have been held up due to litigation by minority shareholders. I don’t think this recommendation is needed because minority shareholders can go to court if they are not happy.”
Grasim last year separated its cement business and moved it into the group-owned UltraTech Cement Ltd as part of a consolidation exercise.
In the past, there have several instances of such related party transactions, including those between Reliance Power Ltd and Reliance Natural Resources Ltd; Reliance Industries Ltd and Reliance Petroleum Ltd; and in the Godrej and Adani groups.
“The critical issue over here is how they define interested parties. A large promoter-shareholder cannot be called an interested party because he will get some shares,” said Jayant Thakur, a Mumbai-based chartered accountant. “So they will have to lay down and define an interested party or the benefit that they get. This recommendation is in line with a consistent policy of Sebi, for example, like not allowing promoters to vote while delisting.”
In other announcements, Sebi made it compulsory for all non-retail investors in public issues to use Asba (application supported by blocked amount) facility from 1 May. This follows Sebi’s earlier moves to establish Asba as an easy, less time-consuming, transparent and cost-efficient method of investing money in public and rights issues.
“We have to be practical about reducing the timeline to seven days for initial public offerings. Now that we are making the Asba mandatory for institutions, the processing time will be reduced,” Bhave said.
Further, Sebi decided to change the registration norms for market intermediaries. To avoid difficulties with respect to inspecting documents of intermediaries repeatedly while renewing registration, the regulator said all intermediaries will be granted registration initially for five years. Based on the performance during this period, they will be granted registration on a permanent basis, Sebi said.
Bhave sought to play down his tenure as chairman of the capital market watchdog, which has been an eventful one.
“Sebi is an institution. Chairmen come and chairmen go, people change, but the institution remains,” he said. “Sebi, as an institution, has only progressed since I was lucky enough to be here when Sebi was formed in 1992. I know what journey Sebi has made, and that journey is not dependent on an X individual changing and so on. It is a journey of an institution. We must remember that.”