Sebi to make related-party transaction norms more stringent

PMAC in favour of real time disclosure of RPTs by the companies

Sebi may soon tighten its norms for 'related party transactions' of listed companies, by mandating greater disclosures and barring concerned parties from voting for shareholder approvals to such deals.

The regulator also plans to widen its definition of 'related party transactions (RPTs)', while making it tougher for promoters and others to use such deals for personal gains.

Besides, the companies may have to adopt a 'policy on RPTs' and make the same public for benefit of all stakeholders, according to a new set of norms being finalised by the Securities and Exchange Board of India (Sebi).

The market watchdog has suggested that boards of listed companies should prepare a policy on dealing with RPTs and the same should be disclosed on its website as well as the annual report.

Observing that mandatory real time disclosures of RPTs might be onerous and could pose practical difficulties for companies to comply with, Sebi has said fragmented reporting of such dealings may not serve the purpose for investors.

"... It is proposed that the companies may be mandated to disclose details of all RPTs on a quarterly basis along with the compliance report on corporate governance," as per Sebi.

However, the Primary Market Advisory Committee (PMAC) was in favour of real time disclosure of RPTs by the companies.

There have been many instances including in the case of Satyam case where entities were found to have abused RPTs for making illegal gains.

The proposals on RPT are part of the watchdog's new set of corporate governance norms which are expected to come into effect from October 1.

Besides, listed companies would soon be required to get RPTs approved by their shareholders through a special resolution but the related parties should abstain from the voting.

Sebi has also proposed that listed entities should have a policy for determining "material RPTs".

A transaction with a related party that is entered into individually or taken together with previous dealings during a financial year, exceeds 5% of the listed company's annual turnover would be considered as a material RPT.

Even if such transactions account for 20% of the listed entity's net worth in a financial year, still they would be considered as material ones.

RPTs would be considered as material depending on which ever (annual turnover or net worth criteria) is higher.

Under the proposed definition, a 'related party' is a person or entity that is related to the company. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party, directly or indirectly, in making financial and/or operating decisions.