INSTITUTIONAL EYE Clarification on IiAS’ Voting Guidelines on Related Party Transactions 01 Jul, 2022

This is to clarify our Voting Guidelines 2022-23 on related party transactions.

Under its voting guidelines, IiAS has stated that it will not support shareholder resolutions that do not specify the period for which the approval is being sought, in other words seeking shareholder approval in perpetuity.

To address this issue, IiAS in its guidelines has said: For IiAS to consider supporting any resolution, it must be presented either for a defined time (i.e., not exceeding five years) or with a reasonable monetary cap: this will ensure that shareholders have clarity on the quantum and have an opportunity to periodically review their decisions.

Further, IiAS will generally vote AGAINST any resolution that is in perpetuity or has a validity of more than five years.

Our thinking has been that as the company’s shareholders change, the new shareholders should be given an opportunity to vote on these resolutions.

We however recognize that companies enter transactions which by their very nature, might be of longer duration, an example being service concession agreements, sale and leaseback transactions, power purchase agreements. We recognize that some of these contracts can extend to a 20+ year period. IiAS will support these transactions if the company can establish a clear business imperative. In such instances, IiAS expects companies to disclose the contours of such contracts, including the indicative value during the life of the contract and the annual value.

Where transactions/contracts/agreements are less critical to its ongoing operations or have break-up clauses, we expect the validity to be five years and if longer, for companies to provide clarity as to why the duration is in the company’s interest.

For all related party transactions (whether annual contracts or long-term contracts), IIAS expects companies to disclose the ultimate ownership of the related party with which the company seeks to undertake these transactions. In assessing these transactions, IiAS will question the underlying rationale for the transaction. This will include raising questions on the business structure. IiAS will generally not support arrangements where promoter-controlled business is running allied or adjacent businesses that are primarily dependent on the listed company: more so if such structures create business vulnerabilities and keep the listed company dependent upon promoter-controlled entities.

iAS is issuing this clarification to its voting guidelines on related party transactions following feedback from market participants. We understand that some companies have been incorrectly interpreting our voting guidelines and their intent, while framing their shareholder resolutions. We expect this clarification will provide clearer guidance.

Read the updated voting guidelines here

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