Sebi discusses related party transaction rules

Bombay : Frantic efforts by major Indian conglomerates to secure relaxations on proposed related party rules ended in disappointment, with the market regulator issuing a circular on Wednesday that closes a loophole that could have allowed some companies to avoid seek shareholder approval for so-called material transactions.

In the circular, the Securities and Exchange Board of India (Sebi) clarified that all material related party transactions (RPTs) would require shareholder approval. He also held firm by making the new rules effective from April 1. “If an RPT is approved before April 1, 2022 by the audit committee and continues beyond this date and becomes material according to the revised materiality threshold, it will be submitted to shareholders at the first general meeting held after the April 1, 2022,” Sebi said. in the circular.

Many companies started getting long-term TPRs approved before April 1 to avoid seeking shareholder approval, hoping the rules would only be enforceable after the new regime was notified and rolled out.

“It is more of a clarification circular, ensuring that all material TPRs approved before April 1 but effective after that will require shareholder approval. In fact, the clarification makes the rule stricter since some were of the view that TPRs approved before April 1 would not require shareholder approval because they were approved before the new provision came into effect from April 1. April 1st. This clarification also fills that gap,” said Lalit Kumar, partner at J Sagar Associates.

The move is perhaps indicative of the working style of new Sebi chairwoman Madhabi Puri Buch, where she has held firm despite serious lobbying from all over India Inc.

“Transparency, accountability and shareholder accountability are the foundation of strong corporate governance. Listed entities should therefore ensure that they comply with the spirit of the law and strive to provide relevant and detailed information to enable and empower shareholders to make an informed decision,” Sebi said in the circular.

In multiple representations, India Inc. has sought to review the new so-called materiality threshold for TCNs.

They had asked for an increase in the materiality threshold of 1,000 crore to 10,000 crore or allow them to continue with the existing rule of 10% of turnover rather than an absolute value, Mint reported earlier.

Large conglomerates argue that a low threshold will force them to seek numerous shareholder approvals for routine transactions, which will affect their ability to react quickly to opportunities and threats in the markets.

Among the members of the Nifty50 index, 47 companies had a consolidated annual turnover 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 turnover, the companies had said.

Sebi also clarified that shareholder approvals would be required even for so-called omnibus approvals.

“It is reiterated that an RPT for which the audit committee has granted omnibus approval will continue to be submitted to shareholders if material,” Sebi said in the circular.

An omnibus resolution is a mechanism by which companies can seek shareholder approval once a year for multiple resolutions rather than seeking shareholder approval each time a transaction crosses the threshold.

Sebi’s position is based on recommendations from its primary market advisory board, which previously told the regulator there were no legal concerns about the new RPT rules and that they did not require a new look.

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