India Inc sees red over new rules governing related party transactions

Companies point out that a materiality threshold of Rs 1,000 crore for related party transactions will slow down business process, harm long term plans

Corporate India is worried over the new norms on related party transactions. Multiple companies and industry bodies have approached market regulator SEBI saying that the new rules, which take effect on April 1, will slow down business decisions and undermine competitiveness.

India Inc has particularly opposed the regulator's decision to set up a threshold of Rs 1,000 crore for related party transactions, beyond which companies will have to take approval from shareholders

The Primary Market Advisory Committee (PMAC) of SEBI, which advises the regulator on policy framework related to primary markets, is likely to meet on Friday to deliberate over the proposals.

In November, SEBI mandated new norms under which it revised the materiality threshold for obtaining shareholder approval to cover transactions that exceed Rs 1,000 crore or 10 per cent of the annual consolidated turnover, whichever is lower.

This means that all transactions above Rs 1,000 crore will require prior approval from minority shareholders. Companies say that determining materiality by the size of the business may lead to practical difficulties for them. Such a low transaction limit constitutes just approximately 1 percent of turnover of the NIFTY 50 companies but will be categorized as material transaction as it exceeds the absolute threshold of Rs 1,000 crore.

For instance, for FY21 in the NIFTY50 list, 47 companies had annual consolidated turnover ranging from Rs 2,000 crore to Rs 5,40,000 crore. So for the large companies, the Rs 1,000 crore threshold did not  constitute even 1 per cent of the turnover.

“An absolute numerical threshold of Rs 1,000 Crore places two unequal companies on an equal footing and negates the very concept of materiality that it seeks to establish. A transaction of Rs 1,000 crore for company A having a turnover say INR 10,000 crore is material but not so much for company B having a turnover of Rs 1,00,000 crore," industry body FICCI said in its representation to the market regulator, which was reviewed by Business Standard.

For company A, the transaction is 10 per cent of the turnover and for Company B, it is just 1 per cent of the turnover,”

A representative of a listed company which is in NIFTY 100 list said that the process of seeking shareholders’ approval is a long one which can reach up to 60 days. Also, minority investors who primarily look to profit in a near term horizon may not be able to see value in a transaction which is beneficial for the company in the long term.

“It is not possible for all investors to possess all relevant knowledge required to make an informed decision which is beneficial for the company. If they reject such transactions, then it will hurt the company’s long term strategy,” he said.

Companies also pointed out that nowhere in the world, regulators have set up numerical thresholds to determine the materiality of related party transactions. “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,” industry body Confederation of Indian Industry (CII) said.