The last guidelines for a market regulator showing tougher requirements for disclosure of transactions related to parties have caused significant concerns about increased compliance loads and potential operational delays.
The directive, issued on February 14, goals to increase transparency and honesty in the processes of approving the transactions related to the party, ordering strict requirements for disclosure and certification.
Even M. Damodaran, a former chairman of the Securities Council and India stock exchanges, criticized the directive, calling it a “complicated document” with inconsistencies. “He has so many things that when you take them seriously, you’ll need an issue. It is healthier to read them, laugh at them and proceed life. Because there are inconsistencies on this document – he said at the event and risk management event on March 5.
Forum of Industry Standards (ISF) – comprehensive representatives from the related chambers of trade and industry India (Assocham), the Confederation of Indian Industry (CII) and the Federation of India Chambers of Commerce and Industry (Ficci) – he formulated new guidelines in consultation with the Share and Sebi exchange.
The goal was to ensure uniformity in accordance with the Sebi regulations regarding the obligations and requirements of disclosure (LODR).
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Main concerns about the new SEBI rules regarding transactions related to parties
Increased compliance load
- Companies must provide extensive financial details and appraisal reports to obtain confirming transactions related to parties.
- Smaller transactions may encounter impractical requirements for disclosure of information, increasing the costs of compliance.
Operational delays
- Stranged documentation and approval processes can decelerate decision and business operations.
- The reduced threshold of materiality (from 10% to 2% of annual turnover) increases the number of transactions requiring approval.
Excessive regulations and ambiguities
- Former chairman Sebi M. Damodaran criticized inconsistencies in the directive.
- A vague language on the day of entry into force – whether it applies to the implementation of approval or transaction.
- Audit committees must balance the editors and disclosure of data, which leads to fears of selective transparency.
Challenges in promoting promoters
- The new categorization of promoters (P, PG, PGI) complicates tracking of indirect participation and interests.
- An ambiguity regarding the verification of the interests of the Promoter Group in related entities.
Influence on business competitiveness
- Excessive disclosure may reveal sensitive business strategies.
- Legal experts say that reducing materiality thresholds doesn’t necessarily improve transparency.
Practical concerns about certification
- Lack of clarity about who qualifies as a “promoter director” in complex corporate structures.
- Unclear procedures if the director of the promoter refuses to certify the transaction related to the party.
The new rules require corporations to provide extensive details about transactions related to parties for the audit committee and shareholders. Companies must provide comprehensive financial information, explaining all missing data. Valuation reports, financial details of related entities and peer comparisons are also required. In addition, explanatory statements for the approval of shareholders must describe intimately the advantages of all transactions related to parties.
Damodaran, in the bulletin published by his advisory management company, Excellence Enablers, said that transactions related to parties are justified by business activities recognized by the Act on corporations and LODR, despite their often negative connotation. However, the last Sebi guidelines introduced complex information requirements, potentially leading to excessive regulatory cultivation, wrote.
“Is this a long procedural recipe for RPT eradication (transactions related to us) in a predible future? If so, would it not be better to say that RPT will no longer be allowed, except for rare circumstances? ” – Damodaran added in his newsletter.
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Lower threshold
Market experts say that detailed requirements for SEBI information can overwhelm corporations, especially those regarding many transactions related to related pages, potentially slowing operations due to delays of approval.
Ketan Mukhija, an elderly partner in Burgeon Law, said that comprehensive information requirements set out in the new guidelines wouldn’t only lead to operational delays, but would also increase the costs of compliance.
“Directive may have inconsistencies that may complicate compliance for listed companies. It requires an excessive level of detail, which may be impractical for smaller transactions and increase compliance, “he said.
Akshaya Bhansali, a partner at MindSpright Legal, argued that the new guidelines effectively reduce the threshold of identification of transactions related to parties requiring approval.
Pursuant to the Act on corporations, the significance threshold is 10% of the annual consolidated turnover of the mentioned entity. According to the new guidelines, this threshold was reduced to 2%, which suggests that more transactions related to parties would have to be revealed.
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Bhansali said that Sebi should explain the applicable legal standards to prevent confusion, adding that “reduction of the standard will not bring transparency”, and excessive disclosure of information may affect business competitiveness.
Other experts said that because most corporations present several items of audit committees and shareholders to approval Omnibus, providing detailed documentation for every proposed transaction related to related pages, would significantly increase documents.
“While the standards provide a uniform framework, the dynamics of various industries still play its role in adding a layer of complexity in reporting RPTS,” said Prashant Thacker, partner Thacker & Associates, a number one company of skilled services. “Different industries have different rules that change the information needed to review RPT and decisions.”
Just a few ambiguities
Thacker also emphasized ambiguities in new guidelines for transactions related to parties, reminiscent of the date of entry into force of the directive.
“Regardless of whether the date refers to the date of approval granted by the audit committee/shareholders, whether it concerns the date of entry into the transaction, it is not clear from the language of the standard,” he said, adding that a more pronounced interpretation could be “counting the RPT introduced on April 1, on April 1, for which approval is approved”.
Experts also stated that the decision of the audit committee to limit confidential data, while ensuring sufficient disclosure in the scope of conscious decisions that aroused concerns about selective disclosure, and the detailed categorization of the promoter was new challenges.
According to the new guidelines, promoters are to be mapped in various categories – Promoters (P), a gaggle of promoters (PG) and entities through which a gaggle of promoters has concerns or interest (PGI).
“A challenge arises on how the audit committee would check whether PG is interested in PGI; And also how the indirect interest in RPT should be determined, “Thacker explained.” Comprehensive data will have to be maintained in order to mapp if P/PG has some indirect shares/participation in other entities. “
Other requirements for disclosure in new guidelines have also raised concerns.
“What happens if the supervisor director refuses to certify? Who exactly is considered the “director of the promoter”, especially in complex group structures? ” – asked Thacker.” Does every director of the promoter have to certify or only people directly involved in the transaction? “
