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Sebi panel proposes overhaul of related party transaction norms

sebi, Securities and Exchange Board of India, corporate sector, Indian express

The Working Group, set up by the Securities and Exchange Board of India in November 2019, has said that related party should be any person or entity belonging to the promoter or promoter group of the listed entity. (file)

The committee set up by the Securities and Exchange Board of India (Sebi) on related party transactions (RPTs) has proposed sweeping changes to strengthen the monitoring and enforcement of norms and bring in more transparency and improve governance.

The panel was constituted amid allegations that many companies in the corporate sector are indulging in rampant RPTs. The panel has said that a related party should be any person or entity belonging to the promoter or promoter group of the listed entity. Besides, any person or any entity, directly or indirectly (including with their relatives), holding 20 per cent or more of the holding in the listed entity should also be considered as related party.

The Sebi committee has also proposed changes to the process followed by a company’s audit committee for approval of RPTs that are material. Further, a format for reporting of RPTs to the stock exchanges has been mooted.

The capital markets regulator, in November 2019, constituted a Working Group to review the policy space pertaining to RPTs under the chairmanship of Ramesh Srinivasan, managing director and CEO, Kotak Mahindra Capital Company. Many firms which defaulted on bank loans were found to have indulged in related party deals to siphon off funds.

The panel recommended that prior approval of the audit committee of the listed entity should be mandatory for transactions carried out between the listed entity or any of its subsidiaries with a related party. “The materiality threshold should be amended to 5 per cent of the annual total revenues, total assets or net worth of the listed entity on a consolidated basis or Rs 1,000 crore, whichever is lower,” it said. It also said the net worth criterion should not apply to companies with negative net worth. Further, companies can specify a lower materiality threshold as per their RPT policies.

Generally, RPT means a transaction involving a transfer of resources, services between the listed entity or its subsidiaries on the one hand and a related party of the listed entity or its subsidiaries on the other hand.

Transaction between listed entity or its subsidiaries and any other entity which is aimed to benefit a related party should be considered as a RPT.

The Working Group noted that the current RPT regulatory framework may be insufficient to cover transactions where the listed entity could transfer its assets/value to a subsidiary, whether in India or overseas, and such entity could then transact with the related parties of the listed entity to move the assets out of the consolidated entity. “It is of significance that the need to regulate the consolidated entity as a whole was also recognised specifically in the report of the Kotak committee on corporate governance.”

Several listed entities in India operate through a network of entities – where some companies have over 200 subsidiaries, step-down subsidiaries, associates, and joint ventures.

While investors hold direct equity only in the listed holding company, they have valued the entire business structure at the time of investment. Therefore, it is important for boards to ensure that good governance trickles down to the entire structure.

Govt invites applications for Sebi top post

Mumbai: The government has invited applications for appointment of a new Chairman for Sebi, as incumbent Ajay Tyagi’s term will end next month,

Any person, preferably with 25 years of experience and over 50 years of age, can apply for the chairman’s post, a notification said. The selection will be done by the Financial Sector Regulatory Appointments Search Committee. The chairman is eligible for a consolidated pay package of Rs 4.5 lakh per month. —ENS

Advisory panel for secondary market rejigged

Mumbai: Sebi has revamped the Secondary Market Advisory Committee that advises the regulator on matters related to stock market and related issues. The panel is chaired by Jayanth R Varma, IIM Ahmedabad professor and former Sebi whole-time member.

Other members of the panel include Ashishkumar Chauhan, BSE MD and CEO; Vikram Limaye, NSE chief; Vijay Chandok, ICICI Securities MD and CEO; Jaideep Hansraj, Kotak Securities MD; and Leo Puri, former MD, UTI MF. —ENS