A panel appointed by the capital markets regulator has proposed significant changes to strengthen the regulatory framework for related-party transactions that have been the subject of many corporate governance matters.
A working group, put in place by the Securities and Exchange Board of India (SEBI) in November 2019, has proposed tweaking the definition of ‘related party’. It also proposed that an audit committee approval must be made mandatory for transactions between a listed entity or its subsidiary with its related party.
Definition of RPTs
“... recommended broadening the definition of RPTs (related-party transactions) to include transactions which are undertaken, whether directly or indirectly, with the intention of benefitting related parties,” stated the report while highlighting the fact that entities have used innovative structures in the past to avoid compliance and disclosure requirements.
The panel has proposed that any entity related to the promoter or promoter group should be considered a related party. Further, any entity holding — directly or indirectly along with their relatives — 20% or more stake in the company should also be considered a related party.
The panel also stated that the current regulations appear insufficient to cover transactions wherein a listed entity could transfer its assets to its subsidiary, which thereon, could deal with a related party of the listed firm. In such instances, the panel has proposed that prior approval of the audit committee should be made mandatory.
Such prior approval would be mandatory if the subsidiary of a listed entity enters into a transaction whose value exceeds 10% of the annual total revenues, total assets or net worth of the subsidiary.
Further, to ascertain the materiality of a related-party transaction for prior approval, the panel has proposed lowering the threshold from the current 10% of the annual consolidated turnover to 5%.
The capital markets regulator has invited public comments and feedback until February 26.
