An outline of e-voting and inter-corporate financing

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe
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Corporate governance is sine qua non for the integrity of corporations, financial markets and market intermediaries. Transparent, ethical and responsible governance practices should be embedded in routine operations of a company.

Intrinsic will and passion for ethical governance are ingrained not only at the board level but also at the key managerial echelons of well governed companies. High-quality governance practices, based on the “triple bottom line concept”, ensure that people, the planet and profit all benefit from corporate growth.

Widening participation

Effective governance requires companies to communicate transparently and assure that stakeholders who may be affected can access information about the company’s decisions. The finance minister in his 2012-13 budget speech proposed to widen opportunities for shareholder participation in important corporate decisions through electronic voting facilities (e-voting).

Shardul Thacker Partner Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Partner
Mulla & Mulla & Craigie Blunt & Caroe

With this in view, the Securities and Exchange Board of India, through a circular dated 13 July, made providing an e-voting facility mandatory for corporate resolutions that require a postal ballot. The e-voting requirement initially applies to the top 500 listed entities on the Bombay and National stock exchanges.

To ensure an accurate e-voting process, the Ministry of Corporate Affairs clarified that any entity providing an e-voting platform must obtain a certificate from the Department of Information Technology of the Ministry of Communication and Information Technology. Two depositories – Central Depository Services (India) Limited and National Securities Depository Limited – currently provide e-voting platforms to Indian corporations.

Inter-corporate transactions

Section 372A of the Companies Act, 1956, deals with inter-corporate loans, investments, guarantees and security. These are common in companies and must be adequately considered since the consequences of non-compliance with the statutory requirements are severe.

The section provides a cap for inter-corporate loans and investments. It stipulates that no company shall directly or indirectly give any loan or guarantee, or provide security in connection with a loan to any other body corporate exceeding 60% of its paid-up share capital and free reserves or 100% of its free reserves, whichever is more.

To go beyond the 60% cap, a special resolution must be passed by the shareholders either through a postal ballot or in the annual general meeting.

Section 292(1)(d) and (e) permit delegation of a company’s powers to invest its funds and to make loans. However, for prudent governance, section 372A requires the unanimous consent of the board of directors. The Ministry of Corporate Affairs earlier clarified that the power of the board under section 372A(2) cannot be delegated to a committee of directors.

Under the governance control mechanism for an inter-corporate finance facility: (1) the unanimous consent of all the directors present at a meeting of the board is required to sanction a resolution on an inter-corporate loan or investment made or guarantee or security provided by the company; (2) a circular resolution or resolution of a committee of directors is not permissible; (3) the board resolution must precede the giving or making of an inter-corporate loan, investment, guarantee or security; (4) the company must disclose to the shareholders full particulars of the inter-corporate loan given or investments made or guarantee provided.

Where any term loan is subsisting from any public financial institution (PFI), and the aggregate amount of loans, investments, guarantees and security exceeds the specified cap, prior approval by the PFI is also required Where the aggregate amount of loans, investments, guarantees and security does not exceed the specified cap but the company has defaulted on the payment of a loan instalment or interest to a PFI, prior approval is required for making any inter-corporate loan, investment or for giving any corporate guarantee or security, irrespective of the limit of 60% of a company’s net worth or 100% of its free reserves.

New dimensions

The Companies Bill, 2011, has made an attempt to further streamline corporate governance, including adding new dimensions for effective control over inter-corporate loans and investments. Clause 186 of the bill states that a company shall not make investments in more than two layers of investment companies and the clause shall be applicable to all classes of companies, whether private or public.

Section 372A of the current Companies Act applies to public companies and to private companies which are subsidiaries of a public company.

Reputable companies have developed prudent governance structures, procedures and practices that ensure ethical conduct at all levels and promote the adoption of a set of principles across all its associate entities. Corporations should resist engaging in practices that are abusive, corrupt or anti-competitive in nature. They should discharge their responsibilities on financial and other mandatory disclosures in letter and spirit.

Shardul Thacker is a partner at Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.

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