Firms wary of SEBI’s rules on related party transactions

In November, the Securities and Exchange Board of India (SEBI) mandated tighter shareholder controls and tighter disclosures around RPTs and so-called physical transactions to check misstatements and omissions sometimes seen in financial statements. The new rules have come into effect from April 1.

Corporate India is primarily concerned about two big issues: a threshold for an RPT to be considered material that requires shareholder approval and the definition of a related party. In the interest of ease of doing business, companies are demanding a re-look at these provisions. “Several amendments, when put together, make it quite difficult for companies to initiate RPTs. The amendments put immense powers in the hands of minority shareholders to approve any RPT. Lalit, Partner, J Sagar Associates Kumar said, the ambit of both ‘concerned parties’ and the RPT has been widened.

He said it is quite likely that minority investors will reject many genuine RPTs. “Some Nifty 50 firms are also taking legal advice whether they can approach the courts to do away with these rules. However, this is only when the various representations sent to SEBI do not work.”

An official of the markets regulator, on condition of anonymity, said without going into further details that SEBI is examining the representations. Mint has reviewed the representations of industry bodies sent in December.

Previously, transactions exceeding 10% of the consolidated annual turnover of a listed entity were treated as physical transactions requiring shareholder approval. Now, every transaction above 1,000 crore would be considered physical and would require prior approval of shareholders, including minority investors. This means that large transactions in the normal course of business would require shareholders’ approval.

“a transaction” 1,000 crore for company A with turnover 10,000 crores may be physical, but not so much for Company B, whose turnover is 100,000 crores,” industry body FICCI said in its representation.

Among Nifty 50 companies, 47 had an annual consolidated revenue of 11,000 crore to 5.4 trillion in FY 2011. For many of them, the threshold of 1,000 crore is not even 1% of the revenue.

“FICCI strongly recommends that the criteria The industry body said Rs 1,000 crore should be removed for determination of ‘material’ RPT and only the percentage of turnover or net worth be determined.

SEBI’s new definition of related party includes any person who is part of a promoter group, regardless of shareholding, and any entity having 20% ​​or more equity, directly or indirectly, in a listed company, which Starting from April 2022. Further, the limit being a related party is reduced to 10% of the equity holding with effect from April 2023.

“Large investors typically invest for a meaningful stake in companies that will be 20% or above 10%—but their intention is not to run the business but to generate a return on investment. Thus, not part of the promoter group. These institutions to be formed may be kept out of the definition of a related party,” proposed the CII in its representation.

For example, Life Insurance Corporation has equity investments in several listed companies. Banks or financial institutions can obtain equity stake by converting the defaulted loan; In some cases, private equity firms can also buy up to 10% stake in listed entities. At present, only mutual funds holding 10% are exempted from being tagged to the related party.

“The shareholding of a listed company changes on a day to day basis. The inclusion of all persons/entities holding beneficial interest in excess of 10% at any point of time during the previous financial year, without any benefit, would increase the compliance cost associated with actively tracking shareholding,” CII said.

The representation has also highlighted how the norms of SEBI are not in conformity with the standards laid down in the Companies Act, 2013.

Under the Companies Act, the Board may sanction RPTs, which are or are not in the ordinary course of business, to the prescribed limit of 10% of the revenue. A share of 20% or more is only considered to have a significant impact.

Generally, there is a strict provision, so companies feel that the strict SEBI rule will become the default norm despite the provisions of the easier Companies Act.

J. “Since listed companies are required to comply with both the laws, in the process of complying with them, it eventually lands on the ground to comply with either of the two,” said Kumar of Sagar Associates.

The companies are demanding two key perks—the requirement of approval by shareholders for RPTs in the ordinary course of business and the ‘common distance’ to be abolished, and the limit of Rs 1,000 crore should be converted into a percentage of revenue to seek shareholders’ approval for material RPTs.