India Inc will need to dig deeper into its books before doing business with related parties, as new disclosure rules from the Securities and Exchange Board of India (SEBI) took effect on Monday. Over 5,000 listed companies will require exhaustive, self-explanatory disclosures for approving related party transactions (RPTs).
The new framework, developed by the Industry Standards Forum (ISF) comprising representatives from FICCI, CII, and Assocham, aims to boost transparency stakeholder oversight. Related party transactions include deals with promoters, subsidiaries, associate companies, key management personnel or major shareholders. Such deals often face governance scrutiny and disclosures due to potential conflicts of interest.
Makarand M Joshi, Founder of MMJC & Associates said, “Explanatory statements for approving material RPTs need to be more self-explanatory, containing information significantly exceeding the Companies Act requirements, such as data placed before the audit committee, pricing methodology, certification from key management personnel and even QR codes for related reports.”
Joshi said that drafting these statements will require far more diligence to enable better-informed decision-making by shareholders.
Tighter norms
The ISF standards go beyond the Companies Act, 2013, requiring companies to submit exhaustive details before seeking approval. Disclosures must now include related parties’ shareholding, profit contribution, financial performance, past transactions, deal rationale, and pricing methodology.
In case of borrowings, sale, lease, or disposal of assets of subsidiaries or units, details of bidders and the process must be submitted. Loan arrangements, guarantees, asset sales and royalty payments will need additional justifications, source of funds, bidding details, and industry comparisons.
Royalty payments require disclosures of purpose, break up, technology, fees and growth comparisons from the past three years. Companies will also need to provide proof of benefits derived from technology transfers and compare with industry peers.
The implementation was pushed to September 1, from earlier July 1, to allow companies more time to adapt. SEBI has also proposed easing some RPT norms, including raising the shareholder approval threshold to ₹5,000 crore and exempting smaller deals from disclosures.