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SEBI tightens norms to curb misuse of related party deals

In a move to promote greater transparency , SEBI has also sought enhanced and timely disclosures of RPTs to audit committees , shareholders and the exchanges.

September 28, 2021 / 08:07 PM IST
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Market regulator Sebi has tightened the regulations linked to related party transactions or RPT’s in India Inc, a thorny issue for several domestic investors. The decision was taken post a board meet held on 28th September and the new regime will come into force with effect from April 1st 2022, unless specified otherwise in the fineprint.

In layman terms, a related party transaction is a transaction which takes place between two parties who hold a pre-existing connection prior to the transaction.

For starters, the definition of related party has been expanded and will now include:

a. all persons or entities forming part of promoter or promoter group irrespective of their shareholding:

b. any person/entity holding equity shares in the listed entity, as below, either directly or on a beneficial interest basis at any time during the immediately preceding financial year:

i. to the extent of 20 % or more

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ii. to the extent of 10% or more w.e.f. April 1, 2023.

Prior to the above changes , only those persons/entities in the promoter category who owned 20 per cent or more stake were “related party” . The new regime will lead to non-promoter shareholders being classified as “related party” at a later stage, as the 10 per cent or higher clause kicks in from April 1, 2023, according to Sudhir Bassi, Executive Director, Khaitan & Co.

Vikram Raghani, Partner, J Sagar & Associates said, “From a governance standpoint, this only makes the rules tighter which should work well for all stakeholders involved.”

The definition of “related party transactions” has been broadened to cover pacts beyond merely listed entities and a related party. The Sebi board also decided that prior approval of the shareholders of the listed entity shall be required for material RPTs having a threshold of lower of Rs. 1000 crore or 10% of the consolidated annual turnover of the listed entity.

Additionally, the new regulations have put greater onus on the audit committees of companies to scrutinize RPT’s involving subsidiaries and certain thresholds have been prescribed for the same. Timely and enhanced disclosures of RPTs to audit committees , shareholders and the exchanges have been mandated too.

“ The changes announced by Sebi are a significant overhaul of the regulatory regime for related party transactions and will increase transparency and give more power to minority shareholders,” added Bassi.

Corporate governance experts have welcomed the move .

“ RPT’s have been an area of concern for investors and consequently Sebi for long. Despite Sebi putting in place regulations, there are still instances of abuse of related party transactions which escape the net by using subsidiaries. These fresh amendments are aimed at curbing this practice,” said Amit Tandon, MD of proxy advisory firm IIAS.

RPT’s have been at the heart of several corporate disputes and controversies in India Inc . The bitter tussle between the promoters of IndiGo Airlines which broke out in 2019 is one of the recent high-profile examples. One promoter, namely Rakesh Gangwal, accused the other – Rahul Bhatia, of irregular related party transactions. Bhatia vehemently denied the same saying the pacts were carried out on an arm’s length basis.  RPTs also stood out in corporate frauds at Satyam Computer Services and Jet Airways.
Ashwin Mohan
first published: Sep 28, 2021 06:24 pm

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