India’s top conglomerates’ frantic efforts to secure relaxations on the proposed related-party rules ended in disappointment, with the markets regulator on Wednesday issuing a circular that closes a loophole that could have allowed some companies to avoid seeking shareholders’ approval for so-called material transactions.
In the circular, the Securities and Exchange Board of India (Sebi) clarified that all material related-party transactions (RPTs) would need approval from shareholders. It also stood its ground in making the new rules effective starting 1 April. “If an RPT is approved before 1 April 2022 by the audit committee and continues beyond such date and becomes material as per the revised materiality threshold, it shall be placed before the shareholders in the first general meeting held after 1 April 2022,” Sebi said in the circular.
Many companies started getting long-term RPTs approved before 1 April to avoid seeking shareholder approvals, hoping the rules will be applicable only after the notification and rollout of the new regime.
“This is more of a clarificatory circular, ensuring that all material RPTs approved before 1 April but effective after that will require shareholders’ approval. In fact, the clarification makes the rule more stringent since some views were being taken that RPTs approved before 1 April would not require shareholder approval because they were approved before the new provision comes into force from 1 April. This clarification plugs this loophole as well,” said Lalit Kumar, partner, J Sagar Associates.
The move is perhaps indicative of the new Sebi chairperson Madhabi Puri Buch’s style of working, where she stood her ground despite serious lobbying from all of India Inc.
“Transparency, accountability and shareholder empowerment are the bedrock of robust corporate governance. Listed entities, therefore, shall ensure to comply with the spirit of the law and endeavour to provide relevant and detailed information to enable and empower shareholders for taking an informed decision,” Sebi said in the circular.
In multiple representations, India Inc. sought a relook at the new so-called materiality threshold for RPTs.
They had sought an increase in the materiality threshold from ₹1,000 crore to ₹10,000 crore or allow them to continue with the existing 10% of turnover rule rather than an absolute value, Mint had reported earlier.
Large conglomerates contend that a low threshold will require them to seek numerous shareholder approvals for routine transactions, impacting their ability to respond swiftly to opportunities and threats in the markets.
Among Nifty50 index members, 47 companies had annual consolidated revenue ranging from ₹11,000 crore to ₹5.4 trillion in FY21. For many of them, the threshold of ₹1,000 crore is not even 1% of revenue, companies had said.
Sebi also clarified that shareholder approvals would be required even on the so-called omnibus approvals.
“It is reiterated that an RPT for which the audit committee has granted omnibus approval shall continue to be placed before the shareholders if it is material,” Sebi said in the circular.
An omnibus resolution is a mechanism through which companies can take shareholders’ approval once a year for multiple resolutions rather than approaching them every time a transaction exceeds the threshold.
Sebi’s stance is based on the recommendations of its Primary Market Advisory Committee, which had earlier told the regulator that there was no legal concern on the new RPT rules and they did not require a fresh relook.
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