Standards for related party transactions challenged, big companies want easing
SEBI’s new rules requiring strict compliance and shareholder approval for related party transactions of large corporations have been met with opposition from some companies and industry bodies.
Some large companies and industry associations have urged SEBI to relax or modify the proposed rules on transactions between companies, founders and entities of a group company, as they believe ensuring compliance would lead to inefficiency in the operation and would increase costs.
Engineering major Larsen & Toubro, industry associations CII and FICCI want the market regulator to remove mandatory shareholder approval for transactions above ₹1,000 crore ($134 million) in related party transactions.
Instead, they want the existing rule of 10% of annual revenue to be the criteria for gaining such approval, even after the new rules come into effect on April 1.
“FICCI strongly recommends that the Rs 1,000 crore criteria for determining ‘material’ PTR be removed and only percentage of turnover or net worth be prescribed,” the body said. industry.
The CII requested that “the absolute numerical threshold be omitted and that the threshold limit of 10% of the listed entity’s consolidated annual turnover be reinstated”.
CII has suggested that prior shareholder approval 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.
Read also : The ABCs of ABG Shipyard’s ₹22,842 crore bank fraud
“The recent proposals announced by SEBI make compliance quite cumbersome and complicated, especially for large companies,” L&T chief financial officer R Shankar Raman said, according to a Mint report.
“The thresholds should have been linked to the size of the company, for example in terms of turnover. Approaching shareholders multiple times throughout the year for approval is not time and business efficient,” he said.
SEBI had tightened rules around related party transactions to reduce cases of misappropriation of funds by founders or major shareholders as alleged irregularities were seen at companies such as DHFL and Fortis Healthcare.
“While the SEBI Standards on Related Party Transactions aim to set a higher governance bar for listed companies to primarily limit cash stripping and ensure that fraud and siphoning off of funds can be reduced, this includes its own practical challenges, particularly for large conglomerates,” said Gaurav Mistry, Associate Partner at DSK Legal.