SEBI Proposes Stricter Regulations for Related Party Transactions and Auditors
In a recent move to enhance transparency and accountability in corporate dealings, the Securities and Exchange Board of India (SEBI) has introduced a more stringent framework for related party transactions (RPTs) conducted by companies. These transactions, which involve the exchange of resources, services, or obligations between related parties, will now face heightened scrutiny and regulation.
Material Subsidiaries and Shareholder Approval
One of the key changes proposed by SEBI is the requirement for audit committee approval for RPTs involving material subsidiaries when transactions exceed 10 percent of the subsidiary’s standalone turnover. Additionally, if these transactions surpass the materiality threshold of ₹1,000 crore or 10 percent of the listed entity’s consolidated turnover, shareholder approval will also be necessary. This shift aims to ensure that significant transactions are subject to proper oversight and governance.
Expanding the Definition of Related Party Transactions
Under the revised guidelines, SEBI has clarified that even transactions with related parties of subsidiaries, which may not be related parties of the listed entity, will now fall within the purview of related party transactions. This expanded definition broadens the scope of oversight, requiring listed entities to seek shareholder approval for transactions that breach materiality thresholds involving their subsidiaries and joint venture partners. This change underscores the importance of transparency and accountability in all corporate dealings.
Expert Insights on Regulatory Impact
Binoy Parikh, Executive Director of Katalyst Advisors, highlights the potential impact of these regulatory changes on joint venture entities, particularly those operating in regulated sectors. He notes that the increased scrutiny on inter-company transactions and capital flows could pose challenges for companies in meeting regulatory requirements and timelines. This heightened focus on related party transactions reflects SEBI’s commitment to upholding corporate governance standards and protecting the interests of shareholders.
Evolving Auditor Appointment Criteria
In addition to reforms related to RPTs, SEBI may soon specify eligibility criteria for the appointment of statutory auditors, including qualifications and experience. This measure aims to ensure that audit firms engaged by listed entities are equipped to handle the complexities of modern business operations. Gaurav Pingle, a practising Company Secretary, emphasizes the importance of aligning the size and capabilities of audit firms with the needs of listed entities to enhance audit quality and effectiveness.
Industry Response to Auditor Oversight
The proposed changes in auditor appointment and disclosure requirements have garnered attention in light of recent events highlighting the importance of independent and capable auditors. Yashesh Ashar, Partner at Illume Advisory, suggests that recent revelations about the limitations of audit firms underscore the need for robust oversight and transparency in the appointment of auditors. By disclosing essential information to audit committees, boards of directors, and shareholders, companies can strengthen their governance practices and build trust with stakeholders.
Enhanced Secretarial Compliance Reporting
SEBI’s proposed amendments also include enhanced disclosure requirements for secretarial compliance reporting by listed entities. The Annual Secretarial Compliance Report may soon become a mandatory component of annual reports, with regulations mandating compliance with applicable secretarial standards. Changes or resignations of secretarial auditors will be classified as material events under listing norms, emphasizing the significance of sound governance practices in corporate operations.
Looking Ahead: Strengthening Corporate Governance
As SEBI moves towards implementing these revised regulations, the focus remains on promoting transparency, accountability, and integrity in corporate transactions and disclosures. By enhancing oversight mechanisms for related party transactions and auditors, regulatory authorities aim to bolster investor confidence and safeguard the interests of stakeholders. These regulatory changes signal a proactive approach to strengthening corporate governance practices and upholding the highest standards of integrity in the Indian capital markets.
