Related-party rules, India Inc seeks a relook


On 23 March, the Confederation of Indian Industry, on behalf of conglomerates such as Tata group, Adani Group and Mahindra Group, suggested that the Securities and Exchange Board of India (Sebi) change the norms and defer the amendments for at least six months.

The CII presentation suggested that the markets regulator either increase the materiality threshold from 1,000 crore to 10,000 crore or just continue with the “10% of turnover” clause rather than an absolute value.

The conglomerates fear that a low threshold, given their large sizes, will require them to go through several lengthy shareholder approval processes, delaying their ability to respond to market conditions and competition and posing other operational challenges. “They will cause a significant delay in execution of transactions, projects, consolidation and expansion, which will consequently lead to a slowdown in business,” one of the people said on condition of anonymity.

“Such materiality threshold norms and related-party definition are unheard of in any large economy. 1,000 crore is a very small amount in large business groups. If it is brought under the materiality clause, public shareholders will have to be approached for running a company every week and then wait for months for their approval. All day-to-day operations will be at the mercy of shareholders who may not even fully understand the business and the commercial arrangements within the group or its financiers,” the second person said, also requesting anonymity.

In November, Sebi proposed amendments to the norms on related-party transactions, some of which are effective from 1 April 2022 to enhance corporate governance standards among publicly traded companies.

In response to the concerns raised by the conglomerates, Sebi said that there is a provision in the new norms for an omnibus resolution mechanism through which companies can take shareholders’ approval once a year for multiple resolutions rather than approaching them every time a transaction exceeds the 1,000 crore threshold, a person close to the markets regulator said.

“Whenever there is a policy change, companies oppose it. Unless there is an acute crisis or a widespread demand for a relook, Sebi’s PMAC (primary market advisory committee) may not review the new norms. Sebi will analyse from 1 April how listed companies deal with new rules. As such, Sebi feels that most of the groups should not face any challenge if they are keen to improve their corporate governance standards and enhance their valuations,” the person said, requesting anonymity.

An email sent to Sebi remained unanswered. Spokespeople for Tata Sons, Mahindra Group and Adani Group declined to comment.

In the November directive, Sebi said any transaction worth 1,000 crore or 10% of the company’s consolidated turnover would be considered a material transaction, and it should be done only after securing shareholders’ approval.

The regulator also said that such transactions, even between two foreign subsidiaries of the company, should be considered material and require shareholders’ approval.

These norms, if implemented, will complicate the operations of large conglomerates that have several global subsidiaries.

They are worried the new norms will impede day-to-day operations even at the subsidiary level and delay or stall the normal functioning of the large listed multinationals, the people cited above said.

The new definition of materiality and related-party transactions includes the value of orders taken by subsidiaries, temporary guarantees provided by holding firms, inter-corporate loans, transactions between promoters and overseas subsidiaries and so on.

Sebi wants to tighten the norms so that promoter group firms are discouraged from entering into transactions that merely benefit them rather than minority shareholders.

Large conglomerates contend that materiality thresholds vary from company to company, depending on the size.

“Providing parent company guarantees to third parties on behalf of subsidiaries is a common phenomenon, and the customers of subsidiaries/joint ventures expect the parent to provide such financial guarantees. It may not be possible for shareholders to understand the importance of such commercial arrangements, and that’s why seeking their approval may not only be meaningless but also may unnecessarily delay operations,” said the first person.

Sebi’s proposal to bring transactions with subsidiary companies and between subsidiary companies within the scope of related-party deals is also being opposed by the conglomerates.

Even if two unlisted subsidiaries within or outside India breach the materiality threshold, shareholders of the listed entity will need to approve such a transaction.

This becomes even more complicated if such subsidiaries are based overseas and are governed by their local laws because Sebi’s latest proposal will essentially bring the overseas companies under the domain of its listing regulations, the people said.

The requirement to take approval for transactions between two foreign subsidiaries of the listed Indian holding company may also amount to a violation of the autonomy of the board of the foreign subsidiary and could be against the basic principles of international law, according to Confederation of Indian Industry.

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