SEBI constituted a Working Group in November 2019 to review the policy space pertaining to related party transactions under the Chairmanship of Mr. Ramesh Srinivasan, Managing Director & CEO, Kotak Mahindra Capital Company Limited.
It was felt by the Working Group that RPTs are prone to abuse by persons in control of the decision making of the corporate entity for personal gains and are therefore, strictly regulated under most regimes. Hence, the regulatory framework should be fortified to mitigate the possibility of abuse. In this direction, SEBI’s Report dated January 22, 2020 highlighting policy proposals with respect to RPTs is surely a welcome step intended to achieve the objective of investor protection as well as ease of doing business. The Report sets out recommendations which include, inter alia, amendments to certain provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”).
Based on feedback from members, NASSCOM submitted its response to SEBI on the proposals of the Working Group.
We welcome the intent of the government to overhaul the corporate governance regime for Related Party Transactions (RPTs) to avoid fraudulent transactions. However, the significantly enlarged scope of the definition of “related party” and “related party transactions” will encounter practical challenges in identifying such transactions and coming to the conclusion that the purpose and effect of such transaction is to benefit a related party. It would make the task of the audit committee onerous as increased number of such transactions would require approval of the committee, particularly when the listed entity has many subsidiaries in and outside India.
The proposal would also correspondingly increase the compliance burden and costs of listed entities and many legitimate transactions may get captured in the enlarged regulatory net.
Our detailed response to SEBI is attached for your reference.