New Delhi, Mar 29 (PTI) Industry body CII on Tuesday appealed before markets regulator Sebi to defer the introduction of amendments to the related party transaction rules by at least six months and sought a detailed deliberation on the regulations given their far-reaching impact on the business environment.
The new rules are set to come into effect from April 1.
The key concern raised by the industry is over the threshold being changed to mean that listed entities need to seek prior approval of the shareholders for all related party transactions exceeding Rs 1,000 crore or 10 per cent of the firm’s consolidated annual turnover, whichever is lower.
In a representation submitted to Sebi, the industry body said, “This may be challenging since it may vary from company to company depending on size and transactions in each company. Materiality by definition is a relative metric evaluated as a percentage in relation to revenues, assets, net worth etc.” The Securities and Exchange Board of India (Sebi) at its board meeting held on September 28, 2021, approved amendments to Regulation 23 of the SEBI LODR pertaining to Related Party Transactions (RPTs).
CII suggested that the absolute numerical threshold of Rs 1,000 crore may be omitted and the existing threshold limit of 10 per cent of annual consolidated turnover of the listed entity be retained. “This will help ensure a company specific threshold as opposed to one-size fits all,” it said.
The industry chamber argued that the amendments will pose operational challenges to the companies concerned, and the underlying shareholder approval mechanism would lose relevance, if shareholders’ approval is sought for routine transactions.
“Shareholders’ approval mechanism is a significant governance mechanism and must be used sparingly and for material transactions. Linking materiality to percentage of revenue, assets, net worth etc. are the global norms, and hence a stringently defined numerical threshold may kindly be avoided,” it said.
The industry body also said that listed entities could lose competitiveness against unlisted competitors since the proposed change in the materiality threshold will not create a level-playing field for all companies, thereby militating against the government’s basic philosophy of ease of doing business.
Companies having multiple subsidiaries including listed ones will face practical difficulties in approving related party transactions as prescribed in the Sebi amendments, CII said.
In order to strike a balance between business considerations and regulatory requirements, in line with existing exemptions provided for RPTs, exemption may be provided to transactions between holding and subsidiary companies having their accounts consolidated with the parent company, the industry body suggested.
CII also claimed that the requirement to take approval for transactions between two foreign subsidiaries of the listed Indian holding company may amount to violation of autonomy of the board of the foreign subsidiary, and could be against the basic principles of the international law.
It suggested a specific carve-out for related party transactions involving foreign subsidiaries of the listed entity. Such transactions may not be subject to the approval of the audit committee and of shareholders of the listed holding company in India, it said.
“In view of the need for detailed deliberation on the regulations on related party transactions and given their far-reaching impact on the business environment and operations in the country, Sebi may consider putting on hold and deferring the amendments for at least six months. This will enable detailed analysis of the regulations instead of making the same applicable in haste,” CII said. PTI RSN HVA HVA
