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Majority of minority basis approval proposed for corporate guarantee extended to promoters

SEBI has proposed that listed companies shall be permitted to extend guarantee/ security to the promoter(s), promoter group, relatives of the director(s) and Key Managerial Persons only if it is in the ‘economic interest’ of the company. The company shall require obtaining prior approval from the shareholders on a ‘majority of minority basis’. This is intended to protect the interest of minority shareholders, in addition to the provisions of Companies Act, 2013 and disclosure requirements prescribed in the SEBI (Listing Obligations and Disclosure Requirements) 2015 (“LODR Regulations”).


Instances of listed companies extending corporate guarantees on behalf of their promoter/promoter related entities came to SEBI’s notice. It found that, at times, promoter/ promoter related entities source funds through complex structures and structured obligations, for which listed companies have provided guarantees. This is sometimes detrimental to the interest of shareholders.

The loophole sought to be fixed

Sections 185 and 186 of the Companies Act, 2013 presently govern the extension of loan or guarantee or security by the listed company. The former bars a listed company from extending the same to director/ his related entities. However, the same is permitted by a special resolution if such loans are utilized by the borrowing entity for the principal business activity. The latter bars a company from directly/indirectly providing loans or guarantee/ security in connection with a loan to any body corporate or person or subscribe/ purchase securities of other body corporate exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

The extant law does not prohibit loans in instances where there is no economic interest. This creates a liability on the company without any benefit. Further, the extant law deals with providing loan or guarantee to director/ related entities. It leaves out promoter/ promoter group/ KMP etc. These occasions risk creating unnecessary liabilities that could be detrimental to shareholders, especially the minority.

SEBI asserted that this creates a possibility for entities being "arm twisted to provide a loan or guarantee/ security in connection with a loan to facilitate promoter/ promoter related entities’ personal obligations without any probable economic benefit to the company".

What is ‘majority of minority basis’?

Section 188 of the Companies Act, 2013 which deals with related party transaction provides that in matters enlisted thereunder, related party members shall refrain from voting. Likewise, Regulation 23 of the LODR Regulations prescribed that no related party shall vote to approve resolutions that are material related party transactions whether the entity is a related party to the particular transaction or not.

Thus, voting on ‘majority of minority basis’ would exclude any related party from voting on the matter. Better clarity can be expected on SEBI’s finalizing the proposal.

‘Economic Interest’ defined

The proposal requires the guarantee to be in the economic interest of the company. Accordingly, SEBI has proposed a definition of ‘Economic Interest’ reiterated as follows:

“An Economic Interest relates to income/ benefit derived from business/ non-business transactions of the listed entity, which may result in pecuniary benefit or otherwise. Further, any transaction involving the economic interest of the listed entity shall necessarily cover the following scenarios:

Have direct/ indirect financial implication of the business activity of the listed entity, which apart from monetary transactions may also include competitive position, employment, awarding of contracts, purchases, leases, sales or any other matter, and/ or
Have a reasonable possibility of generating direct or indirect benefits for the listed company
And the benefit of such transactions shall necessarily accrue to the shareholders of the listed entity.”


Thus this can be said to be a well-timed proposal which includes safeguards for minority shareholders that are not onerous for the companies at the same time. SEBI has placed the paper open for comments up to end of the month and shall thereafter finalize these proposals.

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