Big Firms Wants SEBI to Reverse Related-Party Transaction Rules

Companies want India’s capital market regulator to amend planned regulations on transactions between group firms, founders, and affiliated entities because they will raise compliance costs and cause decision-making delays.

Larsen & Toubro Ltd., a leading engineering firm, and lobbying groups such as the Confederation of Indian Industry want the Securities and Exchange Board of India to eliminate the requirement for shareholder approval for mergers worth more than 10 billion rupees ($134 million). Instead, even after the new restrictions take effect on April 1, the previous requirement of 10% of yearly turnover should apply.

SEBI toughened related-party transaction restrictions late last year to prevent founders from syphoning funds and improve corporate governance. These transactions usually take place between a publicly traded corporation and its founders, connected entities, or major shareholders.

“SEBI’s recent ideas make compliance difficult and time-consuming, especially for major corporations,” says one expert R. Shankar Raman, L&T’s Chief Financial Officer, stated. “Thresholds should have been linked to the company’s size, such as in terms of turnover. Approaching shareholders for approval on many occasions during the year is inefficient in terms of both time and money.”

SEBI did not respond to emails submitted to them.

After potential irregularities were discovered in the cases of DHFL and Fortis Healthcare Ltd, the regulator strengthened the rules. In November 2019, the regulator formed a working group to tighten regulatory standards, and the revisions were later notified for effect in April 2022.

“While SEBI’s related party transaction regulations aim to raise the governance threshold for listed firms, primarily to restrict cash stripping and guarantee that fraud and syphoning of funds are curtailed,” said Gaurav Mistry, associate partner at DSK Legal.