PremiumIn November, Sebi mandated tighter shareholder control and stricter disclosures around RPTs and so-called material transactions to check the kind of misstatements and omissions sometimes seen in financial statements. The new rules take effect on 1 April
MUMBAI : Upcoming rules on related-party transactions (RPTs) and other transactions requiring shareholder clearance have alarmed many companies, who have apprised the markets regulator how cumbersome procedures will slow decision-making, erode competitiveness and affect productivity.
In November, the Securities and Exchange Board of India (Sebi) mandated tighter shareholder control and stricter disclosures around RPTs and so-called material transactions to check the kind of misstatements and omissions sometimes seen in financial statements. The new rules take effect on 1 April.
Corporate India is worried primarily about two big issues: the threshold for an RPT to be considered material requiring shareholder approval and the definition of a related party. Companies are seeking a relook at these provisions in the interest of ease-of-doing business. “Several amendments, when put together, are going to make it quite difficult for companies to undertake RPTs. The amendments put immense powers in the hands of minority shareholders to approve any RPT. Both the scope of ‘related parties’ and RPT has been widened," said Lalit Kumar, partner, J Sagar Associates.
He said it is quite likely that minority investors will reject many genuine RPTs. “Some Nifty 50 firms are also seeking legal advice on whether they can approach courts to get these regulations struck off. However, this is only if the various representations sent to Sebi do not work," a lawyer directly aware of the matter said on condition of anonymity.
An official at the markets regulator said on condition of anonymity and without going into the details that Sebi is examining the representations. Mint has reviewed representations by industry bodies sent in December.
Earlier, transactions exceeding 10% of the consolidated annual turnover of a listed entity were treated as material transactions requiring shareholder approval. Now, every transaction above ₹1,000 crore will be considered material and require prior shareholders’ approval, including those of minority investors. This means large transactions in the ordinary course of business will need shareholders’ approval.
“A transaction of ₹1,000 crore for Company A having a turnover say ₹10,000 crore could be material, but not so much for Company B having a turnover of say ₹100,000 crore," industry body Ficci said in its representation.
Among Nifty 50 companies, 47 had annual consolidated revenue ranging from ₹11,000 crore to ₹5.4 trillion in FY21. For many of them, the threshold of ₹1,000 crore is not even 1% of revenue.
“Ficci strongly recommends that the criteria of ₹1,000 crore for determination of ‘material’ RPTs be removed, and only percentage of turnover or net-worth be prescribed," said the industry body.
Sebi’s new definition of related-party includes any person who is part of the promoter group, irrespective of shareholding, and any entity holding 20% or more equity in a listed company, either directly or indirectly, starting April 2022. In addition, the threshold for being a related party reduces to 10% of equity holding starting April 2023.
“Large investors typically invest for meaningful stakes in companies which would be above 20% or 10%—but their intent is not to run the business but generate returns on investments. Thus, these institutions not forming part of promoter group may be excluded from the definition of a related party," CII proposed in its representation.
For example, Life Insurance Corp. has equity investments in many listed companies. Banks or financial institutions may obtain an equity stake by converting a defaulted loan; in some cases, even private equity firms may buy up to a 10% stake in listed entities. At present, only mutual funds are exempt from being tagged a related party even after holding 10%.
“Shareholding of a listed company changes on a day-to-day basis. Including all persons/entities holding beneficial interest exceeding 10% at any time during the preceding financial year will increase compliance costs associated with actively tracking the shareholding, with no commensurate benefits," CII said.
Representations have also highlighted how Sebi’s standards do not align with the standards set out in the Companies Act, 2013.
Under the Companies Act, the board can approve RPTs, which are not at arm’s length or not in the ordinary course of business up to the prescribed threshold of 10% of revenue. A shareholding of 20% or above is only considered a significant influence.
Generally, the stricter provision prevails, so companies feel that the stricter Sebi rule will become the default norm despite easier Companies Act provisions.
“Since listed companies need to comply with both legislations, in the process of complying with them, it eventually lands up complying with the stricter one of the two," said Kumar of J. Sagar Associates.
Companies are seeking two major allowances—the requirement of approval by shareholders for RPTs in the ordinary course of business and ‘at arm’s length’ should be done away with, and the threshold limit of ₹1,000 crore for seeking shareholders’ approval for material RPTs should be changed to a percentage of revenue.
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