The Securities and Exchange Board of India (Sebi) has made several significant decisions at its September 28 Board meeting. It has given the go ahead for setting up of gold exchanges and social stock exchanges(SSEs). Both will open up wholly new sectors.
Gold exchanges will help India invest and deal in the yellow metal digitally with ease, transparency, reliability and safety. This will be in the form of Electronic Gold Receipts (EGRs). The whole chain from converting physical gold into digital receipts, to their trading on exchanges, to the clearance of transactions, and to the eventual reconversion to physical gold has been meticulously laid down. That said, in India there is an attachment with physical gold. Only time will tell how much of dealings in gold will be made via EGRs.
The new SSEs will have far-reaching implications. The SSEs will help social enterprises raise funds/investment for their projects having a social intent and impact. For this, they need a language and framework to approach investors, communicate with them in commonly understood terms, raise funds through securities that are suitable for such projects, and report in relatable terms on whether their activities are successful or not. These reports also need to be audited by persons having expertise in the area.
The mandate for setting up a directorate of social auditors is given to the Institute of Chartered Accountants of India who will function as a self-regulatory organisation for such auditors. However, this new system is not only complex but almost totally new to India, even in terms of basic concepts. Hence, it may take a long time — at least a couple of years — for it to become fully operational and active on a wide scale. Nonetheless, this is a fascinating new field which will not only streamline philanthropic, social welfare and other similar work, but will also increase their productivity, and investors will be encouraged to participate in an atmosphere of trust and transparency.
On RPTs
Corporates often function as groups of entities. The sheer demands of business mean these entities have to deal with each other. Such dealings, called related party transactions, are necessary evils. But the needs of business should be balanced with the conflict of interest since the persons benefitting from such transactions are also the decision makers. Hence, the present regulations lay down several safeguards.
Currently, there is a fairly wide definition of related parties. Promoters, unless already covered otherwise, are considered as related parties only if they hold 20 percent of the equity of the company. Sebi has now said that all the promoters, without any exception, will be seen as ‘related parties’. Thus, transactions with any of them will be subject to the rigours of law. As discussed earlier, Sebi is seeking to replace the concept of promoters/promoter group with a narrower concept of persons in control. So this new decision will need relook at that time.
Impact On Large Companies
Further, holding and subsidiary companies will now be seen as a group. Thus, related parties of subsidiaries will now also be ‘related parties’ of the parent. Another important change relates to material related party transactions, which ordinarily require approval of shareholders.
Now the benchmark of materiality is lowered. Currently, a transaction is material if its value is at least 10 percent of the consolidated turnover. This is now modified by redefining it at 10 percent of consolidated turnover or Rs 1,000 crore, whichever is lower. This will impact large companies with a consolidated turnover of more than Rs 10,000 crore.
More detailed disclosures of related party transactions are now required to be made to audit committee and to the shareholders. All this, however, reminds us that related party transactions are governed by two sets of overlapping laws — the Companies Act and the Sebi regulations. While Sebi, to its credit, is swifter and keeps improving the law, the divergences between the two laws widens further. It is high time that listed companies are governed only by Sebi, eliminating overlaps.
A Larger Net Worth
The provisions relating to Superior Voting Rights Shares (SR shares) have been tweaked. SR shares are issued to a group, usually the founders, to give them disproportionate voting rights. Ideally, the regulator should not, as argued earlier, meddle, and leave it to the informed decision of the company and the investors.
Currently, the Sebi regulations permit a limited structure of such SR shares with a limited shelf life, and with safeguards. One condition for the issue of such shares is that the SR shareholder should not be part of the promoter group having a net worth of more than Rs 500 crore. The intention is persons with innovative minds but relatively emptier pockets get such shares. The purpose is defeated if high net worth groups can acquire such shares. To strike a better balance, now SR shares can be issued if the individual holder does not have net worth of more than Rs 1,000 crore. The net worth of the individual is considered, and thus the group as a whole could have a multiple of this net worth.
Fit And Proper
Finally, the litmus ‘fit and proper’ test is given an overhaul. It is important for the regulator that persons with a dubious reputation and track record are kept away from the markets. But how does one decide who is ‘fit and proper’? Currently, the tests are subjective, which result in uncertainty and heartburn. To make things transparent, Sebi has proposed a new formula having a mix of principle-based and rules-based criteria for passing this test. A conviction for an offence involving moral turpitude or being declared a wilful defaulter are examples of the rules-based criteria. Integrity, honesty, character, etc. are examples of principle-based criteria.
Clearly, Sebi has taken some major decisions, assuaged demands, and tweaked some areas. But as of now we only know the broad specifics. The fine print in terms of regulations will be released soon, and the devil usually lurks in the detail warranting a relook.
Some amendments will come into effect immediately, some a little later, and some further into the future. This will give people affected time to transition. But considering the significant nature of the decisions, there is a lot to look forward to in the coming months.
Jayant Thakur is a chartered accountant. Views are personal.
Views are personal and do not represent the stand of this publication.
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