Related-party transaction norms questioned, big firms want relaxation

SEBI’s new rules requiring strict compliance and approval of shareholders for transactions between related parties of large companies has been met with opposition from certain companies and industry bodies.

Certain large companies and industry associations have urged SEBI to relax or change proposed rules on transactions between firms, founders and entities of a group company, as they feel ensuring compliance would lead to inefficiency in functioning and add to costs.

Engineering major Larsen & Toubro, industry associations CII and FICCI want the market regulator to do away with the mandatory shareholder approval for deals beyond ₹1,000 crore ($134 million) in related-party transactions.

They instead want the existing rule of 10% of annual turnover to be the criterion for getting such approval, even after the new rules come into effect on April 1.

“FICCI strongly recommends that the criteria of Rs 1,000 crore for determination of ‘material’ RPTs be removed and only percentage of turnover or net-worth be prescribed,” the industry body said.

The CII requested that the “absolute numerical threshold be omitted and threshold limit of 10 per cent of Annual Consolidated Turnover of the listed entity be re-instated”.

CII suggested that the prior approval of the shareholders of a listed entity may be specifically excluded for a related party transaction to which the listed subsidiary is a party but the listed entity is not a party.

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“The recent proposals announced by SEBI makes compliance quite tedious and complicated particularly for large companies,” L&T’s Chief Financial Officer, R Shankar Raman said, according to a report in Mint.

“Thresholds should have had a linkage to the size of the company, say in terms of turnover. Approaching shareholders on multiple occasions in the course of the year for approval is not efficient time wise and business wise,” he said.

SEBI had tightened the rules regarding related-party transactions to reduce instances of founders or major shareholders siphoning off funds as alleged irregularities were observed in companies such as DHFL and Fortis Healthcare.

“While SEBI norms on related party transactions intend to set a higher governance bar for listed companies to predominantly limit cash stripping and to ensure fraud and siphoning of funds can be reduced, it comes with its own practical challenges, especially for large conglomerates,” said Gaurav Mistry, associate partner at DSK Legal.