Source Business Standard *Learning from the USL case* Effective from April 1, 2014, material ( in terms of size) relatedparty transactions ( RPT) are to be approved by shareholders, who are not related parties, by a special resolution ( 75 per cent of polled votes in favour of the resolution). United Spirits Limited ( USL) had put the provision to test recently. Diageo, a UK based company, owns roughly 54.78 per cent shares in USL. Before acquisition by Diageo, USL was a UB group company controlled by Vijay Mallya. The company sought minority shareholders’ approval to the agreements, which include the licence for manufacture and sale agreements with Diageo Brands B. V, Diageo North America and Diageo Scotland, distribution agreements with these three entities and cost sharing agreement with Diageo India private Ltd. Voting through postal ballot, USL’s minority shareholders rejected the proposed contracts with Diageo. Only 34 per cent non- promoter votes were polled. Institutions accounted for around 99 per cent of votes polled. Only 70.03 per cent of votes went in favour of the resolution. Around 30 per cent of the institutional votes polled that went against the resolution. In effect, only 10 per cent of minority votes could derail proposals, which, the company claims, are strategically important for complete integration of USL and Diageo. The results of the postal ballot shows that the company could go forward with the proposed arrangements had the rules required approval of minority shareholders by simple majority (ordinary resolution). The government has proposed to amend the Companies Act 2013 to require minority’s approval by simple majority, rather than by special resolution. This is a welcome move. It is often difficult to form a clear judgment on whether a particular RPT is fair to the company. Therefore, garnering support from those who hold 75 per cent of minority voting rights is difficult even for an RPT that is not abusive. As is evident in the USL case, even institutional shareholders could not build a consensus on the issue. Rejection of important RPT, which is not abusive, by a small group of minority shareholders is likely to hurt the company rather than benefitting it. The Securities and Exchange Board of India should also amend the code of corporate governance ( clause 49 of the Listing Agreement) in line with the proposed amendment in the Companies Act 2013. The new code of corporate governance (revised clause 49) requires that all existing material related- party contracts or arrangements, which are likely to continue beyond March 31, 2015, should be approved by 75 per cent of the shareholders, who are not related parties, in the first general meeting subsequent to October 1, 2014. In compliance with this requirement, USL placed 12 resolutions before minority shareholders in an extra ordinary general meeting ( EGM) held on November 28, 2013. The minority shareholders rejected nine resolutions related to dealings with Vijay Mallyacontrolled UB group companies. According to disclosures on the exchanges, institutional shareholders were instrumental in deciding the fate of the resolutions at the EGM. The board of directors of USL approved the agreements on October 11, 2012, just before Diageo announced its agreement to take over USL on November 9, 2012. It appears that institutions overwhelmingly felt that the agreements were not fair to the company. It is possible that the board of directors had decided in the group’s interest, ignoring the interest of minority shareholders. This is not permitted. The Companies Act 2013 requires directors to act in good faith in the interest of the company, its shareholders, employees, and community and in the interest of protecting environment. Whenever agreements are placed before shareholders for approval, they go through deeper scrutiny by proxy advisory firms, institutional shareholders and other interested stakeholders. Decisions, other than RPTs, also come under shareholders’ scrutiny after disclosure. This exposes the directors to the risk of being sued for negligence in duties. Usually, directors enjoy immunity from liability for the loss that a company might have suffered from business transactions under the ‘ business judgment’ principle. However, if, evidence suggests that directors did not act in good faith or had not collected adequate information or applied skills and judgment and had acted on external influence they are held accountable for the loss suffered by the company. Companies Act 2013 mandates independent directors to get their reservations, if not resolved, recorded in the minutes of the meeting. If an independent director fails to record reservations, it will be assumed that he consented to the decision and he will be held accountable for the same. In a recent judgment, a Hyderabad court imposed fine on highprofile independent directors in the Satyam scam. We should expect an increase in shareholder activism and judicial activism in times to come. Independent directors should be cautious in approving decisions. Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited E- mail: asish. bhattacharyya@ gmail. com RELATED- PARTY TRANSACTIONS Rejection of important RPT, which is not abusive, by a small group of minority shareholders is likely to hurt the company ACCOUNTANCY ASISH K BHATTACHARYYA Independent directors should be cautious in approving decisions *However, in the case of unlisted firms or start- ups, it is a risk one is taking, as the valuations aren’t known. Look at these only as additional benefits* PRIYA NAIR 2 014 has been a good year for students graduating from the IITs and IIMs. Facebook and Google have offered annual packages of ₹ 1- 2 crore. With a catch — half this package consists of employee stock options ( Esops). Indian start- up companies such as Flipkart, Snapdeal and Housing. com, also offered Esops as part of their packages, to attract students. Is this a revival of the Esop culture, earlier seen during the dotcom boom of the early 2000s? Stories of how Infosys, one of the earliest companies to offer Esops, created millionaires of employees such as drivers, are known. Similarly, SKS Microfinance, the only listed micro finance lender, created millionaires of its mid- tier and junior staff when it got listed in 2010. It is a different matter that the stock lost heavily after changes in the micro finance sector regulations made it difficult for the company to recover loans. More recently, when Indian ecommerce giant Flipkart bought out Myntra. com, for a little over ₹ 2,000 crore, about 500- odd employees of the latter who had received Esops saw an increase in their net worth. When Flipkart gets listed, these employees will be able to encash their Esops. Similarly, when Facebook acquired WhatsApp, part of the transaction included $ 3 billion worth of restricted stock units to the WhatsApp founders and employees, locked in for four years from the time the deal was completed. While listed companies use Esops as a retention tool for top- performing employees, start- ups use it as a tool to hire good talent, as they cannot afford to pay very high salaries. What makes an Esop attractive, other than the value or potential value of the shares or units, is the idea of ownership it imparts to the employee holding it. According to Sudip Mukhopadhyay, managing partner, Vantage Health and Benefits Consulting, the trend emerging from the recent placements indicates a revival of the excitement around the information technology ( IT) sector and start- ups, more than a revival in the Esop culture. “ When start- ups offer Esops, it is not based on any concrete financial equation. It means the company is offering a vision and the candidate is willing to be part of that vision,” he says. There is a difference in the way Esops are perceived in India and how these are structured in foreign companies, says Harshu Ghate, cofounder and chief executive, ESOP Direct, a benefits services company. Abroad, employees are given instruments that are not strictly Esops but restricted stock units. They might not work like Esops but be linked to EY. “Even if it is a listed company but operating in a segment where growth is stagnant, then even if employees get Esop, it will not be remunerative. But if it is a start- up which has the potential to grow, there is scope for upside in the stock price,” Shah says. However, this does not apply to all startups. Again, one has to look at the particular segment and the revenue models. Not all IT sector startups will offer the same growth potential. Now, e- commerce firms seem to be on a roll, given the demography and scope of penetration of the internet in India. However, competition segment. If valuations dont work out as projected, the employees could be left holding worthless shares, which cannot be liquidated. Stage of evolution The stage of evolution of the company is another point to consider. With an absolute start- up, that has only seed capital, an Esop might be the only way to attract talent, as the company might not have the funds to offer very high salaries. “At the initial stage, even if the company tells the candidate that he/ she will get two per cent of the shares, it has no valuation. But, here, the candidate is taking part in the In the case of start- ups that have received the second or third round of funding, the risk is less, since there is some tangible valuation. So, the choice for a candidate about joining a company that is offering Esops will also depend to some extent on the stage of evolution of the company. It is least risky in the case of listed companies. Typically, start- ups would offer Esops as part of the compensation package and, hence, the share of Esops in the package might be higher. But a listed company might use Esops as an incentive scheme. In this case, the share of Esops might be lesser. “Very few companies offer Esops to employees at the lower level. These are usually given to employees of the top three to four levels, who can In fact, in the it is safer for candidates to consider only and look to four years to sell Esop shares. Taxation The taxation of Esops is a bit tricky. When the shares get allotted, they are taxed as salary or perquisite. The tax will be paid on the Fair Market Value (FMV) and the price at which they are sold to the employee. The second time the Esop will be taxed is when the employee sells it or exercises the option. This will be taxed as capital gains. The tax will be paid on the difference between the FMV at the time of allotment and the price at which these are sold. Normal capital gains tax will apply; that is, no tax if held for more than a year provided it is sold on the stock exchange. In case of unlisted companies or start- ups, there are Sebi guidelines on how the FMV can be arrived at. What makes an Esop attractive, other than the value or potential value of the shares or units, is the idea of ownership it imparts to the employee holding it BRIEF CASEN M J ANTONY Settlement must be free from duress Settlement of disputes can be challenged in court if a dominant corporation uses coercion, duress or undue influence of various types against a weak party. But the duress must be proved by showing evidence and documents that show undue influence around the time when the settlement was thrust upon the other party. The protest must be made without loss of time, not after undue delay. A bald allegation of duress would not be sufficient, the Supreme Court has stated in the appeal case, New India Assurance Co vs Genus Power Infrastructure Ltd. In this case, the firm purchased a “ standard fire and special perils policy” from the insurance company.. There was a fire explosion in the nearby Indian Oil Corporation ( IOC) terminal causing extensive damage to the firm’s unit. Though it claimed ₹ 29 crore as its loss, the insurer’s surveyor assessed it at ₹ 6 crore. However, the firm signed a letter of subrogation in favour of the insurers for ₹ 6 crore in full and final settlement. It assigned all its claims to the insurance company for recovery of amounts from IOC, RIICO, the Rajasthan government and others who are liable. Later Genus declared that the document was signed under duress and moved the Delhi High Court for appointment of an arbitrator in the disputes. The high court appointed an arbitrator. The insurance company appealed to the Supreme Court, pointing out the settlement document, objecting to arbitration. The Supreme Court set aside the high court order of arbitration. It said that the allegation of duress and undue influence was not supported by evidence and the objection was raised late. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> FCI told to regularise casual labour The Supreme Court directed Food Corporation of India ( FCI) last week to regularise 49 workers who were kept as casual employees for a long time, holding the practice to be an “ unfair labour practice”. They were earlier working in a rice mill of FCI at Durgapur under various contractors. The mill was closed in 1990 and the contract system abolished. Thereafter, the workers were directly employed by FCI as casual employees on daily wage basis. The workers, then, demanded regularisation and the dispute was referred to the labour tribunal. It held that the continued casualisation of the service was unfair labour practice according to the fifth schedule of the Industrial Disputes Act and against social justice principles. FCI was asked to regularise them. The management moved the Calcutta High Court, which set aside the tribunal’s award. Durgapur Casual Workers Union appealed to the Supreme Court. It set aside the high court decision and upheld the tribunal’s order. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Financier not liable to pay damages If a motor vehicle is hypothecated to a finance company and the borrower does not insure it, the claim for compensation must be paid by the latter, and not the financier, the Supreme Court has held in the judgment, HDFC Bank Ltd vs Kumari Reshma. It set aside the Madhya Pradesh High Court view that it was the lender who was liable to pay compensation if the borrower does not insure the vehicle and meets with a road accident, raising claims by the victim. The high court relied on the term in the loan agreement that the bank was required to get the vehicle insured if the borrower failed, to or neglected to, get the vehicle insured. Overruling that view, the Supreme Court asserted that “ the person in possession of the vehicle under the hypothecation agreement is the owner”, according to the provisions of the Motor Vehicles Act. Though the bank was the registered owner of the vehicle along with the borrower, the latter was “ in control and possession of the vehicle”. If he neglects to take insurance and causes injury to a road user as in this case, the borrower is liable to pay compensation. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Arbitration cant be opposed midway A party to the arbitration proceedings cannot raise objections regarding jurisdiction of the tribunal midway, the Supreme Court stated in the judgment, M/ s MSP Infrastructure Ltd vs M P Road Development Corporation Ltd. The disputes in this case were referred to arbitration and the tribunal partly allowed the claim of the contractor. The corporation appealed against it under the Arbitration and Conciliation Act before the district judge. He dismissed it as the appeal was filed two years late, calling the action absolutely unjust and unfair. However, the Madhya Pradesh high court allowed the corporation’s appeal. The firm appealed to the Supreme Court, which quashed the high court order. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Mining federation petition dismissed The Delhi High Court dismissed the writ petition of the Federation of Indian Mineral Industries last week seeking a declaration that the notification of the Union Ministry of Mines issued on July 18 amending Rule 24A( 6) of the Mineral Concession Rules is prospective in nature. The federation had raised several technical objections and cited Supreme Court cases to get the declaration. The rules regarding extension of leases were unreasonable and arbitrary, it was argued. However, the high court rejected all challenges and stated that a court would not give a declaration on hypothetical or speculative facts, unless there is a real cause of action or injury. “ It is not the exercise of judicial power to write legal essays or to give advisory legal opinions. A judge never gives a decision until the facts necessary for that decision have arisen because the imagination of judges, like that of other persons, is limited,” the judgment said. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Dispute over condom name resolved The Delhi High Court stated last week that in a suit for violation of trade mark, if the alleged offender was not aware of the existence of a registered trade mark and admits the mistake at the threshold, it could not be compelled to pay damages and rendition of accounts. It would save the time of the court and the award of damages would be harsh and unjustified. In this case, DKT India vs HLL Lifecare Ltd, the former claimed that HLL, a government of India undertaking that is the largest seller of condoms in the world, had violated its trade mark MoodsXXX. It demanded ₹ 45 lakh in damages. The government firm admitted its mistake and undertook not to use the name. It offered ₹ 1 lakh to DKT. But the latter was not satisfied. The high court stated that the government company was willing to settle the dispute amicably throughout and had stopped the sale of the brand. Therefore, the demand of a huge compensation was unjustifiable. Moreover, the Trade Marks Act and the Copyright Act take a liberal view in such cases.. A weekly selection of key court orders *Electricity Act changes to usher supply overhaul* SHREYA JAI New Delhi, 14 December The amendments to the Electricity Act are likely to change the business dynamics for power distribution companies (discoms). It will provide small consumers achoice of suppliers and allow distribution companies (discoms) to procure power from their own renewable energy plants to meet their renewable purchase obligation. The Union Cabinet on Wednesday cleared changes in the Act. Union Power Minister Piyush Goyal earlier this week said the Bill would be tabled in Parliament soon. Aimed at creating a competitive market for retail buyers, open access will allow consumers of less than one Mw to choose their supplier. In the Electricity Act- 2003, consumers of more than one Mw can change their distribution company. Power generators, too, will be allowed to sell their surplus outside astate.. “Opening the sector will make sure the supply of power is in line with market realities,” said an executive in a distribution company. Currently, state governments can appeal to the regulator to stop such sales in extraordinary circumstances. Distribution companies in other states are unable to freely procure such power. “We end up scheduling costly power, which has pushed us to the wall.. Banks have also withdrawn any support from the discoms,” said a senior executive with a Delhi- based private power distribution utility. The distribution industry owes ₹ 13,000 crore to power plants. A big relief for the distribution sector is the separation of the content and carriage businesses. Building infrastructure for power supply and the supply of power will be two different business entities. Besides, any power supplier can use the infrastructure. The bill also has an important insertion imposing a “duty to connect, supply to request”, where the last- mile supply will keep in mind the economics and viability. “In most developed markets, the carriage business is controlled by the regulator and content, that is power supply, is market driven within a price band,” said the executive. As a separate business, the onus of development of the network will rest with the carriage provider. Distribution companies from across the country have written to the ministry of power seeking a clear demarcation of duties and responsibilities for content and carriage. The distribution companies, which have repeatedly pointed to their financial stress as the reason for not complying with the renewable purchase obligation, have now been asked to generate renewable power to meet their targets. The Act proposes a National Renewable Energy Policy and a new Renewable Generation Obligation. The head of oneof the distribution companies said the sentiment among Indian consumers was that power should be cheap. “All consumers think they are burdened with costly power, whereas the discoms struggle with recovering their cost. In a situation like this, an unbundled distribution sector helps all,” said the executive. |Open access for over 1Mw allowed – enabling inter- state transmission from surplus to deficit points |Power supply business separate from setting infrastructure for supply –opens the market for ancillary business, increases competition |Choice to consumer to select his power supplier –market driven tariffs, better supply and open ground for competition |Time- bound distribution licence – pressure on discom to perform better |RGO along with RPO – promotion of clean energy and its adoption Changes allow those using less than a Mw to choose supplier Building infrastructure for power supply and the supply of power will be two different business entities. Besides, any power supplier can use the infrastructure -- *A.RengarajanPractising Company SecretaryChennai * *Mobile 93810 11200* “ *LET US SUPPORT COMPANY SECRETARY BENEVOLENT FUND FOR COMMON CAUSE*
Posted on: Mon, 15 Dec 2014 01:30:39 +0000
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