India Inc seeks reconsideration of related party rules

On March 23, the Confederation of Indian Industry, on behalf of groups such as the Tata Group, Adani Group and Mahindra Group, suggested that the Securities and Exchange Board of India (SEBI) change the norms and defer the amendments by at least six months.

CII’s presentation suggested that the market regulator raises the materiality limit to either 1,000 crores 10,000 crore or continue with the “10% of turnover” clause instead of full value.

The group fears that the lower limits, given their large size, will cause them to go through several lengthy shareholder approval processes, which will delay their ability to respond to market conditions and competition, and pose other operational challenges. “They will cause significant delays in execution of transactions, projects, consolidation and expansion, resulting in a slowdown in business,” one of the people said on the condition of anonymity.

“Such materiality limit norms and related-party definitions are unheard of in any major economy. 1,000 crore is a very small amount in large business groups. If it is brought under the materiality clause, public shareholders would have to approach running a company every week and then wait for months for their approval. All day-to-day operations will be at the mercy of shareholders, who may not fully understand the business and commercial arrangements within the Group or its financiers,” said the second person requesting anonymity.

In November, SEBI proposed amendments to norms on related party transactions, some of which are effective from April 1, 2022, to enhance corporate governance standards among publicly traded companies.

Responding to the concerns raised by the group, SEBI said there is a provision in the new norms for an all-encompassing resolution mechanism through which companies can seek shareholders’ approval for multiple resolutions once in a year, instead of every time the transaction takes place. They should be contacted if the transaction exceeds. 1,000 crore limit, said a person close to the market regulator.

“Whenever there is a change in policy, companies oppose it. Sebi’s PMAC (Primary Market Advisory Committee) cannot review the new norms unless there is a serious crisis or there is a widespread demand for a relook. Sebi will analyze from April 1 how listed companies deal with the new rules. As such, SEBI feels that most of the groups should not face any challenge if they wish to improve their corporate governance standards and enhance their valuation,” said the person requesting anonymity.

Emails sent to SEBI did not elicit any response. Spokespersons for Tata Sons, Mahindra Group and Adani Group declined to comment.

In its November directive, SEBI said that any transaction value 1,000 crore or 10% of the consolidated turnover of the company shall be considered as a physical transaction, and should be done only after obtaining the approval of the shareholders.

The regulator also said that even such transactions between two foreign subsidiaries of the company should be considered significant and require the approval of the shareholders.

These norms, if implemented, would complicate the operations of a large conglomerate with multiple global subsidiaries.

They are concerned that the new norms will hamper day-to-day operations even at the subsidiary level and delay or halt the normal functioning of large listed multinationals, the people cited above said.

The new definition of materiality and related party transactions includes value of orders placed by subsidiaries, temporary guarantees provided by holding firms, inter-corporate loans, transactions between promoters and foreign subsidiaries, etc.

SEBI wants to tighten the rules so as to discourage promoter group firms from entering into transactions that benefit only them rather than minority shareholders.

The larger conglomerate argues that the limits of materiality vary from company to company based on size.

“It is a common occurrence on behalf of subsidiaries to provide parent company guarantees to third parties, and clients of subsidiaries/joint ventures expect the parent to provide such financial guarantees. It may not be possible to understand the importance, and hence seeking their approval may not only be meaningless, but may also unnecessarily delay operations,” the first person said.

Groups are also opposing SEBI’s proposal to bring transactions with subsidiaries and between subsidiaries under the purview of related party deals.

Even if two unlisted subsidiaries within or outside India breach the materiality limit, the shareholders of the listed entity would be required to approve such transaction.

It becomes even more complicated if such subsidiaries are located overseas and are governed by their local laws as SEBI’s latest proposal will essentially bring foreign companies under the ambit of its listing rules, the people said.

According to the Confederation of Indian Industry, the requirement to seek approval for transactions between two foreign subsidiaries of a listed Indian holding company may also infringe upon the autonomy of the foreign subsidiary’s board and may be against the fundamentals of international law. ,