India Inc’s main grouse is that a monetary threshold of ₹1,000 crore annually has been introduced above which shareholders nod is required for related party transactions. Earlier Sebi norms only required shareholder approval if such dealings of a company were in excess of 10% of its consolidated turnover.
VK Viswanathan, an independent director who is on the board of half a dozen companies, including Bharti Airtel and HDFC Life Insurance, believes the rules could create an ‘unlevel’ playing field for large companies who have several such high-value transactions within the group.
“If there is a refining company and it sources raw material from a group entity, this is a core operation of the company. To seek pre-approval from shareholder for several such transactions can create genuine difficulties,” said Viswanathan.
The threshold limits could create problems for large conglomerates, some of whom have already instituted task forces to figure out how to comply with the new regulations, according to people ET spoke with.
“A threshold of ₹1,000 crore for a company like us is problematic. We set up SPVs for each project and the project value often exceeds that amount. The contract is executed between group companies. So, this falls within the ambit of shareholder approval. This could become very onerous,” said R Shankar Raman, whole-time director and chief financial officer, Larsen & Toubro.
Several independent directors and auditors ET spoke with said SEBI was tightening related party disclosure norms because of issues that have cropped up in recent years. Companies that have come under the Sebi scanner for related party deals over the past four years include DHFL, Fortis Healthcare, Reliance Home Finance, CG Power and Industrial Solutions among others.
Auditors believe that the Companies Act had watered down provisions for shareholder consent for related party dealings and a certain amount of tightening was required in the case of listed entities.
CII has claimed that the new guidelines are not in line with international standards. “We compared various jurisdictions like the UK, Singapore and Malaysia, but didn’t find any international benchmark where there exists a provision of any numerical thresholds,” it has said.
Many experts, however, believe India can’t be compared with international jurisdictions.
“Indian capital markets are unique because of prevalence of promoters. The promoter group provides stability and long-term vision. But families can often put their interest above minority shareholders’. Our investigations show that Sebi’s proposals are not out of context given the learnings and failures from past frauds,” Vishesh Chandiok, chief executive officer, Grant Thornton Bharat LLP, told ET.
“Sebi felt that in the case of listed entities the bar should be higher to safeguard public interest. That is the intent behind the regulation,” said Govind Ahuja, partner, S.R. Batliboi and Associates LLP.
