SEBI seeks stricter norms for related party transactions by companies with high debt

The regulations mandate that if any specific entity triggers the specified threshold of Rs 500 crore, it shall ensure compliance with corporate governance norms within a period of 6 months.

The Securities and Exchange Board of India (SEBI) on February 8 proposed a strengthened protocol for monitoring related party transactions by High-Value Debt Listed Entity (HVDLEs), which will incorporate objections from debenture holders in select cases.

HVDLEs are listed companies which have listed their non-convertible debt securities and have an outstanding value of listed non-convertible debt securities of Rs 500 crore and above.

SEBI had determined companies that qualify for the HVDLE role as of March 31, 2021. Currently, a total of 138 companies fall under the HVDLE rubric.

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The regulations mandate that if any specific entity triggers the specified threshold of Rs 500 crore, it shall ensure compliance with corporate governance norms within a period of six months.

Through a notification issued on September 7 last year, LODR (Listing Obligations and Disclosure Requirements) regulations were amended to make corporate governance norms applicable to HVDLEs. They were also mandated to operate on a ‘comply or explain’ basis until March 2023. The 'comply or explain' framework indicates that an entity that is not able to achieve full compliance with the LODR regulations till March  31 of this year, shall explain the reasons for such non-compliance or partial compliance and the steps initiated to achieve full compliance.

The new consultation paper has been released by the market watchdog considering the ‘impossibility of compliance’ representations that several HVDLEs made to the regulator. They argued that they were facing challenges in complying with the LODR regulations that pertain to RPTs.

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"When these HVDLEs enter into RPTs," the companies told the regulator, "they are required to obtain the approval of the majority of the shareholders who are not related parties. Such shareholders, who are not related parties, either hold a negligible portion of the equity or none at all, in which case the HVDLEs are not able to transact such RPTs because of the ‘impossibility of compliance’ with the provisions of LODR regulations."

Consequently, the market regulator sought data from all HVDLEs about their shareholding patterns. After studying the data, the regulator proposed that for companies, in which, 90 percent or more of the shareholders are related parties, the company shall send a copy of the agenda item to debenture holders whenever a general meeting is to be held wherein approval for an RPT transaction/s is sought.

In case, objections are received from debenture holders carrying 75 percent of the total outstanding debentures, then the Board of Directors shall ensure that the agenda item pertaining to the RPT is withdrawn.

In case, there is no objection received, then the company is free to place that RPT agenda item for approval before other shareholders in the general meeting.

Explaining the rationale underpinning the proposal, the market regulator observed that major corporate wrongdoings were often carried out by persons with the ability to influence the decisions of the company, especially, by using shell or apparently unrelated companies to siphon off large sums of money. Such siphoning is made possible by using certain innovative structures that effectively circumvent the regulatory framework of  RPTs.

“Apart from the use of circular transactions, companies appear to have diluted or circumvented the requirements under their policy on RPTs by procuring approvals for continuous lending to group companies. Hence,  is an imperative need to ensure that the RPTs all listed are regulated, the regulator said in the consultation paper.

Another proposal mooted in the paper is that once an entity triggers the Rs 500 crore threshold for HVDLEs, corporate governance norms shall apply to it till such time that the outstanding value of the non-convertible debt securities falls below the threshold and remains so for a period of three years.

Comments have been sought on the proposal latest by February 23.