The market regulator’s recent guidelines outlining tougher disclosure requirements for related-party transactions has sparked significant apprehension about increased compliance burdens and potential operational delays.
The directive, issued on 14 February, aims to enhance transparency and fairness in the related-party transaction approval processes, mandating stringent disclosure and certification requirements.
Even M. Damodaran, former chairperson of the Securities and Exchange Board of India, has criticized the directive, calling it an “elaborate document’ with inconsistencies. “It has so many things that if you take them seriously, you will have a problem. It is better to read them, laugh at them and go on with life. Because there are inconsistencies within that document,” he said at a governance and risk management event on 5 March.
The Industry Standards Forum (ISF)—comprising representatives from the Associated Chambers of Commerce and Industry of India (Assocham), Confederation of Indian Industry (CII), and Federation of Indian Chambers of Commerce and Industry (Ficci)—had formulated the new guidelines in consultation with the stock exchanges and Sebi.
The objective was to ensure uniformity in compliance with Sebi’s regulations for Listing Obligations and Disclosure Requirements (LODR).
Also read | Mint Explainer: What are related party transactions and why do they run into controversies
The main concerns over Sebi’s new rules on related-party transactions
Increased compliance burden
- Companies must provide extensive financial details, and valuation reports to get approvals for related-party transactions.
- Smaller transactions may face impractical disclosure demands, raising compliance costs.
Operational delays
- Stringent documentation and approval processes could slow decision-making and business operations.
- Lowered materiality threshold (from 10% to 2% of annual turnover) increases the number of transactions requiring approval.
Regulatory overreach and ambiguities
- Former Sebi chair M. Damodaran criticized inconsistencies in the directive.
- Unclear language on effective date—whether it applies to approval or transaction execution.
- Audit committees must balance data redaction and disclosure, leading to concerns over selective transparency.
Challenges in mapping promoters
- New categorization of promoters (P, PG, PGIE) complicates tracking indirect shareholding and interests.
- Ambiguity on verifying promoter group interests in related entities.
Impact on business competitiveness
- Excessive disclosure may expose sensitive business strategies.
- Legal experts argue that reducing materiality thresholds will not necessarily improve transparency.
Practical concerns in certification
- Lack of clarity on who qualifies as a “promoter director” in complex corporate structures.
- Unclear procedures if a promoter director refuses to certify a related-party transaction.
The new rules require companies to provide extensive details about related-party transactions to the audit committee and shareholders. Companies must furnish comprehensive financial information, explaining any missing data. Valuation reports, financial details of related parties, and peer comparisons are also required. Moreover, explanatory statements for shareholder approvals must detail the benefits of any related-party transactions.
Damodaran, in a newsletter published by his governance advisory firm, Excellence Enablers, said related-party transactions are legitimate business activities acknowledged by the Companies Act and LODR despite their often negative connotation. However, Sebi’s recent guidelines have introduced complex information requirements, potentially leading to regulatory overreach, he wrote.
“Is this a long procedural prescription to root out RPTs (related-party transactions) in the foreseeable future? If so, would it not have been preferable to state that RPTs will no longer be allowed, except in rare circumstances?,” Damodaran added in his newsletter.
Also read | M. Damodaran: A letter to Sebi’s new chief
A lower threshold
Market experts argue that the Sebi directive’s detailed information requirements may overwhelm companies, particularly those dealing with numerous related-party transactions, potentially slowing operations due to approval delays.
Ketan Mukhija, senior partner at Burgeon Law, said the exhaustive information requirements stated in the new guidelines would not only lead to operational delays but also increase compliance costs.
“The directive may have inconsistencies that could complicate compliance for listed companies. It mandates an excessive level of detail, which may be impractical for smaller transactions and increase compliance burdens,” he said.
Akshaya Bhansali, partner at Mindspright Legal, argued that the new guidelines effectively lower the threshold for identifying related-party transactions that require approval.
Under the Companies Act, the materiality threshold is 10% of the annual consolidated turnover of the listed entity. Under the new guidelines, this threshold has been reduced to 2%, meaning more related-party transactions would have to be disclosed.
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Sebi should clarify the applicable legal standards to prevent confusion, Bhansali said, adding that “reducing the standard will not bring transparency” and that excessive information disclosure could affect business competitiveness.
Other experts said that since most companies present several items to their audit committees and shareholders for omnibus approval, providing detailed documentation for every proposed related-party transaction would significantly increase paperwork.
“While the standards provide a uniform framework, the dynamics of different industries still play their role in adding a layer of complexity in reporting the RPTs,” said Prashant Thacker, partner at Thacker & Associates, a leading professional services firm. “Different industries have different rules, which changes the information needed for RPT reviews and impacts decisions.”
A bunch of ambiguities
Thacker also highlighted ambiguities in the new guidelines on related-party transactions, such as the directive’s effective date.
“Whether the date refers to the date of the approval granted by the audit committee/shareholders, or it pertains to the date of entering the transaction, is not clear from the language of the standard,” he said, adding that a clearer interpretation would be to “count the RPTs entered on or after 1 April for which approval is being sought”.
Experts also said the provision for an audit committee to redact sensitive data while ensuring sufficient disclosure for informed decisions raised concerns about selective disclosure, and that detailed promoter categorization posed new challenges.
Under the new guidelines, promoters are to be mapped under different categories—Promoters (P), Promoters Group (PG), and Entities where the Promoters Group has a concern or interest (PGIE).
“The challenge arises as to how the audit committee would verify whether or not the PG has interest in PGIE; and also how the indirect interest in RPT shall be determined,” Thacker explained. “Comprehensive data will need to be maintained to map whether a P/PG has any indirect shareholding/interest in other entities.”
Other disclosure requirements in the new guidelines have also raised concerns.
“What happens if a promoter director refuses to certify? Who exactly is considered a ‘promoter director’, especially in complex group structures?,” Thacker questioned. “Does every promoter director have to certify, or just those directly involved in the transaction?”
