SEBI at its Board Meeting held on September 28, 2021, approved amendments to Regulation 23 of the SEBI LODR pertaining to Related Party Transactions(‘RPTs’). The amendments notified in November 2021 are applicable from 1 April 2022 and raise concerns on few key issues. Commencing 1 April 2022, the threshold is being changed to mean that listed entities would be required to seek prior approval of the shareholders for all transaction(s) exceeding Rs. 1,000 crores or 10% of the consolidated annual turnover of the listed entity, whichever is lower.
In a Representation submitted to SEBI, CII stated that “This may be challenging since it may vary from company to company depending on size and transactions in each company. Materiality by definition is a relative metric evaluated as a percentage in relation to revenues, assets, net worth etc. The absolute numerical threshold of Rs. 1,000 crores may be omitted and the existing threshold limit of 10% of annual consolidated turnover of the listed entity be retained. This will help ensure a company specific threshold as opposed to one-size fits all.”
Further, “CII stated that this requirement will not only pose operational challenges to the companies concerned, but the very underlying shareholder approval mechanism would lose relevance, if seeking shareholders’ approval is sought for routine transactions. Shareholders’ approval mechanism is a significant governance mechanism and must be used sparingly and for material transactions. Linking materiality to % of revenue, assets, net worth etc. are the global norms and hence a stringently defined numerical threshold may kindly be avoided. Listed entities could lose competitiveness against unlisted competitors since the proposed change in the materiality threshold will not create a level-playing field for all companies thereby militating against the Government’s basic philosophy of ease of doing business”.
Companies having multiple subsidiaries including listed subsidiary companies will face practical difficulties in approving related party transactions as prescribed in the SEBI amendments. In order to achieve balance between business considerations and regulatory requirements, in line with existing exemptions provided for RPTs, exemption may be provided to transactions between holding and subsidiary companies whose accounts are consolidated with the parent company.
CII has been highlighting how the requirement to take approval for transactions between two foreign subsidiaries of the listed Indian holding company may amount to violation of autonomy of the Board of the foreign subsidiary and could be against the basic principles of international law. A specific carve-out may be made for related party transactions entered into by the foreign subsidiaries of the listed entity. Such transactions may not be subject to the approval of the Audit Committee and of shareholders of the listed holding company in India.
In view of the need for detailed deliberation on the regulations on related party transactions and given their far-reaching impact on the business environment and operations in the country, SEBI may consider putting on hold and deferring the amendments for at least 6 months - currently applicable from 1 April 2022. This will enable detailed analysis of the Regulations instead of making the same applicable in haste, stated CII.
New Delhi
29 March 2022