Clipped from: https://www.business-standard.com/article/opinion/related-party-trouble-122021501652_1.html
Seeking shareholder approval would impede normal functioning
Listed companies could have practical issues in complying with one of the stipulations of the November 2021 circular of the Securities and Exchange Board of India, which comes into force on April 1. This concerns related-party transactions (RPTs) of listed companies. From the next fiscal year, RPTs must be reported in detail with justification for reviews by the audit committee, and the details must be shared with the stock exchanges. In addition, RPTs must also be approved by shareholders. Sharing this information in a detailed format, and in a timely fashion with the audit committee, may boost corporate governance, and sharing it with the exchanges would help investors understand the dynamics of businesses better. But getting shareholder clearance for RPTs will be very difficult for a wide variety of listed businesses. This could lead to hold-ups and delays in carrying on normal operations.
It is undeniable that RPTs can often be the route by which cash is siphoned off from a business into the pockets of unscrupulous promoters. However, the suggested review by the audit committee is quite extensive. Apart from the type and material terms of transaction, the name of the related party and its relationship, and the tenure of the RPT must be specified along with the value as a percentage of consolidated turnover and as a percentage of the counter-party’s turnover. A justification for the transaction must also be presented. If the RPT relates to loans, inter-corporate deposits, the details of the proposed terms, the applicable rate of interest, etc must also be mentioned. Assuming the review is carried out meticulously by the audit committee, and the details are shared with the stock exchanges, there should not be any necessity for prior shareholder approval.
Many industries have extended value chains, which may be integrated in different ways. For example, an automobile manufacturer or a cellphone maker may source parts from many ancillary manufacturers; an oil and gas production company may sell its production to a refiner, which, in turn, may market refined products like petrol or diesel, perhaps even through another company. In all these cases, it is possible that a listed entity may have a presence across the value chain and RPTs may occur regularly and repeatedly. To take a specific example, oil producer ONGC has a controlling stake in HPCL, which is an oil-refiner and marketer. There would be RPTs amounting to thousands of crores on a continuous basis, since ONGC supplies crude oil and gas to HPCL refineries, which refine and retail the products at the petrol pump.
It would be impractical to hold up activity at refineries, and on assembly lines, to await shareholder approval for such transactions. There would be similar situations in many other industries including service industries. Setting a threshold of Rs 1,000 crore or 10 per cent of the turnover for such approvals could still make it a cumbersome process, causing delays and adding to costs. The cause of transparency would be served adequately by the details of RPT-related information as presented to the audit committee for review and if this information is presented to the stock exchange, it is in the public domain. The market regulator should consider modifying or removing the clause about seeking shareholder approval, which could impede normal business.
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