Sebi does not budge on new RPT rules
Premium- Sebi clarified all the so-called material related party transactions (RPTs) would need an approval from shareholders post 1 April
MUMBAI : India Inc which has been lobbying for the past four months to tweak the new related party rules was in for disappointment, since the market regulator on Wednesday issued a circular making the rules slightly more stringent.
Securities and Exchange Board of India (Sebi) in the circular clarified all the so-called material related party transactions (RPTs) would need an approval from shareholders post 1 April. Sebi stood its ground in stating that the new rules for RPTs will become effective starting 1 April.
“If an RPT is approved before 1 April 2022 by the audit committee and continues beyond such date and becomes material as per the revised materiality threshold shall be placed before the shareholders in the first general meeting held after April 1, 2022," said Sebi in the circular.
Many companies had started getting long term RPT approved before 1 April to escape the need of a shareholder approval. This is because they took a view that rules are applicable only after notification and roll out of the new regime.
“This is more of a clarificatory circular ensuring that all material RPTs approved before April 1 but effective after that will require shareholders’ approval. In fact the clarification makes the rule more stringent, since some views were being taken that RPTs approved before 1 April would not require shareholder approval because they were approved before the new provision coming into force from April 1. This clarification plugs this loophole as well," said Lalit Kumar, partner, J Sagar Associates.
This is perhaps indicative of the new Sebi chairperson Madhabi Puri Buch’s style of working, where she stood her ground despite serious lobbying from all of India Inc, including industry bodies such as CII and FICCI.
“Transparency, accountability and shareholder empowerment are the bedrock of robust corporate governance. Listed entities, therefore, shall ensure to comply with the spirit of the law and endeavor to provide relevant and detailed information to enable and empower shareholders for taking an informed decision," Sebi said in the circular.
In multiple representations India Inc had sought a relook at the new so-called materiality threshold for RPTs.
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They had sought either increase the materiality threshold from ₹1,000 crore to ₹10,000 crore or just continue with the “10% of turnover“ clause rather than an absolute value. Mint had reported on 31 January and 30 March.
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, India Inc had represented.
Even on the so-called ‘omnibus approvals’ Sebi has clarified that even they require shareholder approval.
“It is reiterated that an RPT for which the audit committee has granted omnibus approval, shall continue to be placed before the shareholders if it is material," Sebi said in the circular.
Omnibus resolution is a mechanism through which companies can take shareholders’ approval once a year for multiple resolutions rather than approaching them every time a transaction exceeds the threshold.
Sebi’s stance comes from the recommendation of its Primary Market Advisory Committee (PMAC) which had earlier told the regulator that there was no legal concern on the new RPT rules and they did not require a fresh relook.
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