Context:
On February 14, 2024, the Securities and Exchange Board of India (SEBI) issued stricter disclosure requirements for Related-Party Transactions (RPTs) to
- Enhance transparency in corporate governance.
- Ensure fairness in RPT approval processes.
- Standardize compliance under Listing Obligations and Disclosure Requirements (LODR).
These guidelines were formulated by the Industry Standards Forum (ISF) which includes Assocham, CII, and Ficci in consultation with SEBI and stock exchanges.
Key Disclosure Requirements
Companies must now
- Provide extensive financial details of RPTs.
- Justify missing data, if any.
- Submit valuation reports and peer comparisons.
- Explain the benefits of RPTs in shareholder approval statements.
- Obtain audit committee and shareholder approval for RPTs.
Industry Concerns & Criticism
a) Compliance Burden & Operational Delays
- Stricter documentation requirements may increase compliance costs for businesses.
- Operational delays could arise due to extensive approvals and data submissions.
b) Criticism by Former SEBI Chairperson M. Damodaran
- Described the guidelines as an “elaborate document with inconsistencies.”
- At a March 5 governance and risk management event, he remarked:
“If you take these rules seriously, you will have a problem. It is better to read them, laugh at them, and move on.” - In a newsletter by Excellence Enablers, his governance advisory firm, he questioned:
“Are these rules a procedural prescription to eliminate RPTs in the future? Wouldn’t it have been better to simply state that RPTs will not be allowed except in rare circumstances?”
c) Perceived Regulatory Overreach
- RPTs are legitimate business activities under the Companies Act and LODR.
- However, SEBI’s complex documentation requirements may hinder normal business operations.
Implications for Corporates & Investors
a) Positive Aspects
- Increased transparency
- Stricter disclosures may reduce conflicts of interest and protect minority shareholders.
- Stronger corporate governance
- Improved compliance could lead to greater investor confidence.
b) Negative Aspects
- Higher costs and compliance burden
- Companies may struggle to meet the detailed reporting standards.
- Risk of overregulation
- Excessive disclosure requirements could discourage legitimate business transactions.
- Impact on business growth
- Companies reliant on intra-group transactions (e.g., conglomerates) may face delays in decision-making.
A Need for Balance
SEBI’s new RPT guidelines reflect a strong push for transparency, but their complexity and compliance costs could hinder businesses. The real challenge is ensuring accountability without stifling legitimate transactions. Whether SEBI will revise these norms based on industry concerns remains to be seen.
Source: Mint
