SEBI panel tightens grip on related party norms

KS Badri Narayanan Chennai | Updated on January 28, 2020 Published on January 28, 2020

20% stake, person controlling company irrespective of stake deemed to be related parties, says panel

Soon, holding 20 per cent stake in a company will come under related party ambit.

“Any person or any entity, directly or indirectly (including with their relatives), holding 20 per cent or more of the holding in a listed entity should also be considered as related party,” says a new proposal by a SEBI panel.

Though it’s not clear on institutional/portfolio investments, experts believe private equity, LIC, domestic institutional investors and foreign portfolio investors may be affected, as some of them hold sizeable stakes in a few companies.

In November 2019, SEBI had constituted a nine-member committee, under the chairmanship of Ramesh Srinivasan, Managing Director and CEO of Kotak Mahindra Capital Company, to review the policy pertaining to related party transactions (RPTs).

The committee has also proposed a change in the definition to cover any person or entity that directly or indirectly exercises control, irrespective of shareholding. The move is to cover parties that exercise influence on a company.

“Considering that promoters may exercise control on promoter group entities and influence decision-making on the group, the working group recommended that promoter group members may also be included under the definition of a related party, irrespective of their shareholding,” the panel said.

The panel has also said that a transaction between a listed entity or its subsidiaries and any other entity which is aimed to benefit a related party should be considered an RPT.

The panel also recommends mandatory prior approval from the audit committee of the listed entity for transactions carried out between the listed entity or any of its subsidiaries, with a related party.

The committee has mooted a threshold of 5 per cent of the annual total revenues, total assets or net worth of the listed entity on a consolidated basis or ₹1,000 crore, whichever is lower, for transactions between the company and its subsidiaries.

However, the net worth criterion would not apply to companies with negative net worth, it said.

The audit panel needs to be aware of the value of a proposed RPT as a proportion of the annual total revenues, total assets and net worth of the consolidated entity, the panel advised.

Further, justification for each individual transaction must be provided, unless there are a series of transactions interdependent of each other.

Further, companies can specify a lower materiality threshold as per their RPT policies, the panel clarified.

However, associate companies and joint ventures need not be included under such additional prior approval requirements, the panel said.

Subsequent material modifications of RPTs require prior audit committee approval, and if applicable, shareholders’ nod too, the recommendations mooted.

Disclosure norms

Each type of RPT with a single party should be disclosed separately and there should be no clubbing or netting of transactions of the same type, the recommendations said, and added that RPTs with the same counter party and of the same type may be aggregated.

The panel also suggested improvements in monitoring and enforcements in three main areas, including use of structured data to augment enforcement, and use of standardised identifiers to identify RPTs.

SEBI said it welcomes public comments and views on the proposals by February 27.

Published on January 28, 2020
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