Big firms ask Sebi to reverse 'tedious, complicated' related-party rule

Companies want India’s capital market regulator to change proposed rules on transactions between group firms, founders and related entities as they will lead to an increase in compliance costs and delay decision making. 

Engineering major Larsen & Toubro Ltd. and lobby groups including the Confederation of Indian Industry want the Securities and Exchange Board of India to scrap the mandatory shareholder approval for deals beyond 10 billion rupees ($134 million). Instead, the existing rule of 10% of annual turnover should prevail even after the new rules kick in on April 1.

Late last year, SEBI tightened rules on related-party transactions to curb siphoning of funds by founders and ensure better corporate governance. These transactions are essentially conducted between a listed company and its founders, entities related to the owners or with large shareholders.

“The recent proposals announced by SEBI makes compliance quite tedious and complicated particularly for large companies,” L&T’s Chief Financial Officer, R. Shankar Raman said. “Thresholds should have had a linkage to the size of the company, say in terms of turnover. Approaching shareholders on multiple occasions in the course of the year for approval is not efficient time wise and business wise.”

Emails sent to SEBI did not receive a response. 

The regulator tightened the norms after alleged irregularities were observed in the case of some companies including DHFL and Fortis Healthcare Ltd. The regulator set up a working group in November 2019 to strengthen regulatory norms and later notified the amendments for implementation from April 2022.

“While SEBI norms on related party transactions intend to set a higher governance bar for listed companies to predominantly limit cash stripping and to ensure fraud and siphoning of funds can be reduced, it comes with its own practical challenges, especially for large conglomerates,” said Gaurav Mistry, associate partner at DSK Legal.