Shareholder veto to check promoter lending to own cos

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Oct 18 2011, 07:56am hrs
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Concerned over the opaque manner in which some promoter-driven listed companies route funds from the parent firm to subsidiaries for inorganic diversification, the corporate affairs ministry has decided to make prior shareholders' approval mandatory for such transfers in the form of intra-corporate loans. As per a new clause inserted in the Companies Bill slated to be taken up by the Cabinet shortly, companies will have to first seek shareholders' approval for such fund transfers at their annual general meetings

and only then will the matter be put up before the board of directors.

However, this provision will only apply if companies invest in unrelated businesses. For instance, a software firm investing in realty.

Currently, corporate boards decide on inter- and intra-corporate loans and later place it before shareholders at their AGMs for vetting.

Official sources said this provision has been inserted in the Companies Bill as a fallout of the recent spectrum scam. At least two companies real estate firm Unitech and consumer durables and energy major Videocon floated wholly-owned subsidiaries, Unitech Wireless and Datacom, respectively, to enter the telecom sector. As the subsidiaries later got embroiled in the 2G scam, shares of the parent companies tanked and investors suffered. The implication is clear: The shareholders lost thanks to a board decision. If the suggested reforms are put in place, the final blame will rest on shareholders as they had authorised the management and board to take decisions.

Under the Companies Act, inter-corporate loans are allowed only when the amount advanced to the subsidiary is less than 60% of the parent firms paid-up share capital.

This is not the first time the issue has come up in the Companies Bill. Its earlier draft, which lapsed in 2009, had also sought to address the issue by streamlining the process. However, it had not incorporated the endorsement of shareholders, which it has done now.

Jamil Khatri, head of accounting advisory services at KPMG, said that under the Companies Act, shareholders are rarely in a position to influence a board decision on inter- and intra-corporate loans and investments. Though Khatri welcomed the move, he said the government must distinguish between related and unrelated transactions. For instance, shareholder approval should mandatory only when a group company invests in a business totally unrelated from that of the parent firm, he said

Delhi-based senior corporate lawyer Sumant Batra said shareholder approval alone would not be enough to ensure that the tool is not misused. Though shareholders have no tool at present to veto such decisions under Section 372 (that deals with inter-corporate loans and investments) the government must lay down certain qualification criteria for such investments, he said. According to him, a special committee must be set up, which will look into the viability of the loan advancements and investments.