Family matters

Having introduced, and with much fanfare, stringent governance norms for related party transactions by Indian companies, it is unfortunate that both the Ministry of Corporate Affairs and the Securities and Exchange Board of India should spend the past few months watering down these rules. The latest instance is SEBI’s September 15 circular which exempts government companies from the ambit of the regulations and allows smaller related party deals to go through without shareholder approval. Transactions with promoters, directors and group entities are rampant in corporate India. A BusinessLine study showed that 90 per cent of the top 500 companies reported related party dealings last year. Many corporate practices that hurt minority shareholder interests — unjustified royalty payments to promoters, asset transfers to group firms, opaque acquisitions of group entities and exorbitant managerial pay — have their origins in related party dealings; therefore, a lax approach towards regulating them cannot be justified.

Ever since they were notified, the differing rules for related party transactions under the Companies Act (applicable to all firms) and SEBI’s listing guidelines (applying only to listed firms) have been a bone of contention. Regulators have responded by issuing multiple clarifications to harmonise the rules. However, in seeking to simplify these laws, it would have been better had the MCA adopted SEBI’s clearer and more water-tight rules rather than both regulators granting ad hoc exemptions that pander to corporate demands. Take SEBI’s latest circular. Having clearly laid down that companies would have to seek shareholder approval for all ‘material’ related party deals, why has it now raised the threshold for these ‘material’ transactions from 5 per cent to 10 per cent of turnover? Given that net profit margins for most listed firms amount to 7-8 per cent (of turnover), transactions amounting to 5 per cent of turnover can cause significant damage. In any case, given that the objection to related party transactions is based on principle — they create blatant conflicts of interest between promoters and shareholders — what is the logic for automatically rubber-stamping smaller transactions? In practice, it is often through small-ticket rent and lease arrangements, perks, allowances and payments to relatives for ‘services rendered’, that promoters of listed firms siphon off public money. Seen against this backdrop, corporate India’s argument that curbing related party transactions affects the ‘ease of doing business’ is specious.

For the same reasons, SEBI’s decision to entirely exempt government-owned companies from related party rules is retrograde. The argument that the new rules will stand in the way of these firms sharing each other’s subsidy burden or buying or selling from each other in fact exposes the extent to which other investors’ interests are compromised when state-owned firms dance to their promoter’s tunes. If the Centre wants the private sector to take its related party regulations seriously, it has to be a better role model and ensure that public sector firms conduct their transactions with one another on an arm’s length basis.

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