Opaque related-party transactions biggest corporate governance issue

Written by fe Bureau | Mumbai | Updated: Aug 22 2014, 07:04am hrs
Opaque related-party transactions is the most important corporate governance issue in promoter-managed firms, according to a poll conducted by proxy advisory firm IiAS.

The new regulations regarding related-party transactions (RPT) apply only to the listed company and not to its unlisted subsidiary, and companies seem to have begun exploiting this operational flexibility. Leaving unlisted subsidiaries out of the regulatory ambit may be seen as providing managements with some operational flexibility. But companies seem to misuse the provisions to circumvent the intent of the regulation. This will only invite the ire of both investors and regulators. In which case, companies must be prepared to pay the price of tighter regulations, said IiAS.

One such example is Cairn Indias recent announcement of extending a $1.25-billion loan to a Vedanta Group company. A two-year agreement was signed in the first quarter of 2014-15, and $800 million was disbursed. This disclosure was made on an earnings call no mention of this in the quarter results nor in company presentations, with the company arguing that it need not be.

Investors began asking why this transaction was not brought to shareholder vote. Thats because loan transactions dont fall under the category of RPTs that need to be brought to shareholders for a vote under the Companies Act 2013. Under the revised Clause 49 of the Listing Agreement, such a transaction would be but the clock on that begins ticking from October 1, 2014, said the IiAS report. Following the market shock and the investor outcry, the company clarified that the loan was given by a subsidiary (unlisted) of Cairn India to a Vedanta Group company.

This is a classic maneuver. RPT disclosure and shareholder approval requirements do not apply to unlisted subsidiaries of listed companies. Neither under the Companies Act, 2013, nor under the revised Clause 49 of Sebis Listing Agreement. So, a company can continue to do as it pleases through an unlisted subsidiary. At best, shareholders have a say on transactions (once the specified thresholds of materiality are met) between a listed company and its unlisted subsidiary, but not on any transaction undertaken between two unlisted subsidiaries, IiAS further noted. It has become more difficult for investors to access the performance of subsidiaries, according to IiAS.

Companies are required to publish standalone and consolidated results, but are no longer required to disclose subsidiary accounts in their annual reports. Sure, eager investors can write to the company and ask for the subsidiary accounts, but it only means that they can get details of the transaction. Investors still cant do much.