Mumbai: Proxy advisory firm Stakeholders Empowerment Services (SES) has asked the Securities and Exchange Board of India (Sebi) to reconsider regulations governing shareholder approval for related-party transactions (RPTs).
RPTs, which are financial transactions between two businesses that have pre-existing connections, have received a lot of regulatory attention over the past couple of years for alleged lack of transparency, abusive business arrangements and hurting the interest of minority shareholders.
Under the new laws, minority shareholders have become extremely powerful, following the introduction of legal provisions, which took away the rights of controlling shareholders to influence RPTs.
However, Tata Sponge Iron Ltd’s (TSIL) annual general meeting on 18 July proved the downside of the law.
A group of shareholders, accounting for 3.77% of the company’s equity, voted to embarrass the $104 billion Tata Group by making sure the related-party proposals worth ₹1,170 crore were rejected.
TSIL, a subsidiary of Tata Steel, which also owns 55.5% shares in the company, asked shareholders to vote on five resolutions. Two resolutions were passed by the shareholders. However, the promoter Tata Steel, could not vote on the three related-party resolutions.
The RPTs to purchase coal and iron ore, the sale of power and sponge iron to group companies at an arm’s length pricing were part of regular business transactions between TSIL and other group companies, including Tata Steel, Tata International and Tata International Singapore Pte.
Public institutions own 9.3% shares in TSIL, and non-public institutions hold the remaining 36.2% shares. However, only 55.41% of public institutions participated in the voting while 0.11% of non-public institutions cast their vote for the three RPTs. Given that 67.13% and 13.6% of public institutions and non-public institutions voted against the resolution, it was enough to defeat the three RPTs.
“It’s not the first time this has happened, but it is the first for a large group such as the Tatas,” J.N. Gupta, co-founder and managing director, SES, told Mint. “I think it’s ridiculous because the protection that the rules want to give minority shareholders was never meant for them to be used this way. This way, you are bulldozing over the majority.”
TSIL is an Odisha-based subsidiary of Tata Steel that manufacturers sponge iron. In FY18, it reported a turnover of ₹816.65 crore and net profit of ₹140.86 crore. “TSIL has said that they will be buying iron ore based on the open mining prices of Odisha Mining Corporation. How much more transparency do you want?” asked Gupta.
A TSIL spokesperson said: “These RPTs are important for the company. Tata Sponge is evaluating all options and will take appropriate action in the matter.”
“Everybody is surprised (we are saying this) since we are champions of minority shareholders and are now speaking against minority shareholders,” Gupta said. “I don’t think TSIL expected this. Every year, the same resolutions are proposed and are passed. This year, there was some change in shareholding, which I suspect, was probably by some competitor, who bought shares and then defeated the resolution. It’s not an accidental failure, it’s a planned failure. TSIL will probably return with the same resolutions again.”
SES has suggested that the capital market regulator considers a change in the law regarding RPTs that would bring in some minimum voting on outstanding public shares, encourage participation by retail investors so that voting outcome cannot be strategised by a few shareholders and mandate all institutional investors, including banks, FIIs, corporates and HNIs, to vote.
However, Shriram Subramanian, founder and managing director of proxy advisory firm InGovern Research Services, disagreed. “The onus is on the company, that is, Tata Sponge, to educate shareholders and make a compelling argument for this related-party transaction. I don’t think Sebi needs to put a minimum cap of some voter participation because that would be reactionary to what I believe is the only one kind of instance.”