SEBI reacts sharply to related party transaction rules

In the circular, the Securities and Exchange Board of India (SEBI) clarified that all material related party transactions (RPTs) would require approval from the shareholders. It also stood its ground for the new rules to take effect from April 1. SEBI said, “If an RPT is approved by the Audit Committee before 1st April 2022 and continues beyond such date and becomes material as per the revised materiality limits, it shall be considered for the first general elections held after 1st April 2022. will be placed before the shareholders at the meeting.” in the circular.

Many companies started getting approval for long-term RPTs before April 1 to avoid seeking shareholder approval, hoping that the rules would come into force only after the new regime is notified and rolled out.

“It is more than a clear circular, it ensures that all material RPTs are approved before April 1 but will require shareholders’ approval to take effect after that. In fact, the clarification makes the rule more stringent as some were considering that RPTs approved before April 1 would not require shareholder approval as they were approved before the new provision came into force from April 1. Lalit Kumar, partner, J Sagar Associates said, this clarification also removes this loophole.

The move is perhaps a sign of the working style of Madhabi Puri Buch, the new chairperson of SEBI, where she stood her ground despite serious lobbying from All India Inc.

“Transparency, accountability and shareholder empowerment are the cornerstones of strong corporate governance. Hence, listed entities shall ensure to comply with the spirit of the law and endeavor to provide relevant and detailed information to enable and empower shareholders to take an informed decision ,” SEBI said in the circular.

In several representations, India Inc has sought a re-look at the new so-called materiality limit for RPTs.

He had demanded an increase in the physicality limit. 1,000 crores 10,000 crore or allow them to continue with the existing 10% turnover rule instead of full value, Mint had earlier reported.

The larger conglomerate argues that the lower limit would require them to have multiple shareholder approvals for regular transactions, affecting their ability to respond rapidly to opportunities and threats in the markets.

Out of the Nifty 50 Index members, the annual consolidated revenue of 47 companies was: 11,000 crore to 5.4 trillion in FY 2011. For many of them, the threshold of The companies had said that 1,000 crore is not even 1% of the revenue.

SEBI also clarified that the so-called omnibus approval would also require the approval of the shareholders.

“It is reiterated that an RPT for which omnibus approval has been accorded by the Audit Committee shall continue to be placed before the shareholders,” Sebi said in the circular.

An omnibus resolution is a mechanism through which companies can seek shareholders’ approval once a year for multiple resolutions instead of exceeding the transaction limit each time.

SEBI’s stand is based on the recommendations of its Primary Markets Advisory Committee, which had earlier told the regulator that the new RPT rules do not have any legal concerns and do not require a fresh look.