Sebi's expert panel proposes stricter related-party regulations

The Securities and Exchange Board of India (Sebi) on Monday proposed tightening the norms governing related-party transactions (RPTs) at listed companies to prevent their misuse, and safeguard the interest of minority shareholders. The regulator has proposed widening the definition of related party and RPTs, changing the threshold for determining RPTs, and tighter disclosures and approvals.

The recommendations are made by a nine-member expert panel led by Ramesh Srinivasan, managing director & CEO, Kotak Mahindra Capital. Under the current definition, any person or entity belonging to the promoter group of the listed entity and holding 20 per cent or more of the listed entity is treated as a related party. The panel has proposed a change in the definition to cover any person or entity that directly or indirectly exercises control, irrespective of shareholding.

The move is to cover parties that exercise influence on a company. “Considering that promoters may exercise control on promoter group entities and influence decision making on the group, the working group recommended that promoter group members may also be included under the definition of a related party, irrespective of their shareholding,” the panel said. In recent years, Sebi has come across instances of misuse of RPTs by promoters causing losses to minority investors.

“The prevalent use of complex group structures and subsidiaries for RPTs, particularly with unlisted entities, has increased concerns such as siphoning of funds, money laundering and round tripping,” the group said in a discussion paper.

Sebi’s working group debated allowing related parties not concerned with a particular RPT to vote. However, decided against the move fearing misuse.

The expert panel highlighted the low level of minority shareholder voting in the country and empahised the need to maximize informed shareholder participation to curb misuse of RPTs.

The panel has also suggested changes to the disclosure framework to make sure companies provide information in reader-friendly manner.

The panel also suggested strengthening of monitoring and enforcement of norms pertaining to RPTs.

Sebi has invited public comments before February 26. Based on the industry feedback, Sebi will finalise the new framework.