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Business News/ Market / Stock-market-news/  Sebi relaxes related-party transaction rules

Sebi relaxes related-party transaction rules

Regulator exempts smaller firms from complying with new Companies law, extends deadline for listed firms to appoint women directors

Taking industry representations into account, Sebi has made adjustments to clauses linked to related-party transactions, bringing them in line with the new Companies Act. Photo: Abhijit Bhatlekar/MintPremium
Taking industry representations into account, Sebi has made adjustments to clauses linked to related-party transactions, bringing them in line with the new Companies Act. Photo: Abhijit Bhatlekar/Mint

Mumbai: The Securities and Exchange Board of India (Sebi) on Monday relaxed its proposed corporate governance norms by bringing related-party transaction norms in line with the Companies Act, exempting smaller firms from complying with the new law and extending the deadline for listed firms to appoint women directors.

In April, Sebi had announced an overhaul of corporate governance norms for listed companies in an effort to improve transparency in their transactions and give minority shareholders a bigger say in management decisions. The new rules take effect from 1 October.

However, in a circular issued on Monday, the capital market regulator said it has received representations from market participants, including companies and industry associations, highlighting certain practical difficulties in ensuring compliance and seeking clarifications on certain provisions.

Taking industry representations into account, Sebi has made adjustments to clauses linked to related-party transactions, bringing them in line with the new Companies Act.

Among the changes made by Sebi is a change in the definition of a related party. A party will be considered a “related party" only if it falls under the definition of “related party" under the Companies Act or the accounting standards. Under the original proposal, Sebi’s definition of related party was much broader than what was prescribed by the Companies Act.

“The definition of ‘related party’ is narrower under the Companies Act compared to what was proposed by Sebi in its original norms and hence this will be a substantial relief," said Mehul Modi, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd.

Sebi has also eased the benchmarks used to define “material related party transactions", bringing them in line with the Companies Act. Under the listing agreement, all material related party transactions have to be approved by a majority of minority shareholders in order to ensure that business decisions taken by promoters or majority shareholders are not detrimental to the interests of small shareholders.

According to the new norms, material transactions will be defined as those that account for more than 10% of the annual consolidated turnover of an entity. The original provisions had set the cut-off at 5% of the annual stand-alone turnover or 20% of the stand-alone net worth.

Importantly, Sebi has exempted related-party transactions between a company and its wholly owned subsidiary from minority shareholder approval.

“A wholly owned subsidiary is basically an extended arm of the company. It would have been a procedural nightmare for companies to get approval for each such transaction," said Modi.

Companies can also now seek an omnibus approval from their audit committees for transactions that are in line with the company’s approved related-party transaction policy. Such an omnibus approval would be valid for up to one year and for transactions of up to 1 crore.

Sebi has also said that the new corporate governance norms will not be applicable to companies having paid up equity share capital not exceeding 10 crore and net worth not exceeding 25 crore.

The deadline for listed firms to appoint at least one woman director on their board has been extended from 1 October 2014 to 1 April 2015.

As many as 755 out of a total 1,469 NSE-listed companies or 51% of the companies were still to appoint a woman director as on 31 August, according to data from, operated by corporate database provider Prime Database.

Further, Sebi has clarified that the rule which says that independent directors can be appointed for a maximum of 10 years (two tenures of five years each) will only be applicable from 1 April.

This will provide considerable breathing room to companies that have been struggling to find qualified independent directors.

“The norms on tenure of independent directors will not have much impact even if they are applicable from 1 April 2014, because the new law is prospective in nature. So, for directors who have completed 10 years it does not mean much," said Prithvi Haldea, chairman and managing director, Prime Database, a New-Delhi based primary market tracking firm.

Haldea added that transparency cannot be assured by tweaking the tenure of directors and changing the gender proportion of boards.

“In my opinion, corporate governance is such a thing which can be changed only by way of better disclosures, establishing improved value systems among promoters and imposing adequate and substantive penalties on defaulters," said Haldea.

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Anirudh Laskar
Anirudh reports on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the corporate and financial services industry. Over the past 17 years, he has covered many beats including banking, NBFCs, aviation, automobile, insurance, markets, SEBI, IRDAI, mutual funds, investment banking, private equity, deals, and conglomerates.
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Published: 15 Sep 2014, 11:34 PM IST
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