India's leading industry bodies like the Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce & Industry ( FICCI ) have expressed concern about new SEBI guidelines on related party transactions which come into effect from 1st April 2023.

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They say the new guidelines will create ambiguity and increase the compliance burden. Once these new rules come into effect audit committee of a listed entity would have to approve transactions between two or more of the company's subsidiaries. The audit committee's approval would be required if the value of the transaction with the subsidiary exceeds 10 percent of the annual turnover of the listed company.

The industry is particularly concerned about shareholder approval that would be required for material-related party transactions above 1000 crore or 10 percent of annual turnover.

Several companies are worried that this numerical threshold of 1000 crore would put small and large companies on the same footing and for large companies to seek shareholder approval for transactions of 1000 crore would be a serious impediment in day-to-day contracts, execution of orders, access to supply chains, export markets and technology. This is also because every company with a turnover of 1000 crore or 1 lakh crore would have to seek shareholder approval for related party transactions and the process could take up to 45 to 60 days.

Also Read: Explained: SEBI's changes on related party deals

Dev Bajpai, executive director, legal & corporate affairs and company secretary, HUL, said, "Related Party Transactions (RPT) are covered under the SEBI Regulations as also under the Companies Act, 2013. In keeping with the government's stated policy of promoting ease of doing business & reducing the compliance burden, both regulations need to converge in terms of thresholds fixed for such transactions, exemptions available from such transactions in certain cases.

If there is consistency in this regard, it will help the industry with ease of doing business. Also, there have been frequent changes made to RPT provisions which makes it onerous to do business with the RPT regime-changing frequently. This should be avoided."

Vijay Iyer, EY India, said, "The Amendment requires audit committee and shareholder approval for transaction with the third party which ultimately benefits the related party. Due to lack of objective guidance on identifying such third-party transactions, it can lead to unnecessary controversy and violations of law. It is imperative to dilute these provisions and to provide for exemptions for transactions undertaken in the ordinary course of business to prevent unnecessary disruption."

First Published:Feb 14, 2022 4:54 PM IST