'Sebi norms on related party deals would pose difficulties'

Capital market watchdog Sebi's new norms on related party transactions could pose practical difficulties for listed companies, according to consultancy KPMG. The norms are part of a stringent corporate governance framework for listed companies that would be effective from October 1.

Under the new corporate governance rules mooted by Sebi, all material related party transactions require shareholders' approval through special resolution. Besides, the related parties should abstain from voting on such resolutions.

"Requiring approval from non-related party shareholders even for related party transactions that are at arms length and in the ordinary course of business would be burdensome and pose practical difficulties.

"This is particularly excessive for transactions with the company's own subsidiaries," KPMG's Global Head of Accounting Advisory Services Jamil Khatri said in a statement.

As per Sebi, any transaction with a related party that exceeds 5 per cent of the annual turnover or 20 per cent of the networth of the company -- whichever is higher -- on the basis of latest audited financial statement would be considered "material".

It would be applicable for transactions entered with a related party individually or taken together with previous transactions during a financial year.

Khatri noted that the provision is different from that present in the new Companies Act where related party transactions require shareholders' approval only if it is not at arms length or not in the ordinary course of business.

"Given that the Companies Act has been recently enacted, differences between the amendment and the Companies Act requirements in areas such as approval of related party transactions and limits for independent directors should have been avoided," he said.

Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India, said that from merely placing related party transactions before the audit committee under the old corporate governance code the requirement now is far more elaborate on all fronts. 

"All existing material related party contracts or arrangements as on the date of this circular which are likely to continue beyond March 31, 2015 shall be placed for approval of the shareholders in the first general meeting subsequent to October 1, 2014," the Securities and Exchange Board of India (Sebi) said in its circular on April 17.

Among others, listed companies would be required to disclose policy on dealing with related party transactions on their website as well as in the annual report.