On March 23, the Confederation of Indian Industry, on behalf of conglomerates such as Tata Group, Adani Group and Mahindra Group, suggested that the Securities and Exchange Board of India (Sebi) amend the standards and postpone the changes at least six months.
The CII presentation suggested that the market regulator raise the materiality threshold of ₹1,000 crore to ₹10,000 crore or just continue with the clause “10% of turnover” rather than an absolute value.
Conglomerates fear that a low threshold, given their large size, will require them to go through several lengthy shareholder approval processes, delaying their ability to react to market conditions and competition and posing other challenges. operational. “They will cause a significant delay in the execution of transactions, projects, consolidation and expansion, which will consequently lead to a slowdown in business,” said one of the people on condition of anonymity.
“Such materiality threshold standards and a definition of related parties are unprecedented in any major economy. ₹1,000 crore is a very small amount in large business groups. If subject to the materiality clause, public shareholders would have to be approached to run a company every week and then wait for months for their approval. All day-to-day operations will be at the mercy of shareholders who may not even fully understand the business and business arrangements within the group or its financiers,” said the second person, who also requested anonymity. .
In November, Sebi proposed amendments to standards on related party transactions, some of which take effect April 1, 2022 to improve corporate governance standards among publicly traded companies.
In response to concerns raised by conglomerates, Sebi said there is a provision in the new standards for an omnibus resolution mechanism whereby companies can seek shareholder approval once a year for multiple resolutions rather than approach each time a transaction exceeds the ₹Threshold of 1,000 crore, said a person close to the market regulator.
“Every time there is a change in policy, companies oppose it. Unless there is an acute crisis or widespread demand for a makeover, Sebi’s PMAC (Primary Market Advisory Committee) may not review the new standards. Sebi will analyze from April 1 how listed companies are handling the new rules. As such, Sebi believes that most groups should face no challenges if they wish to improve their corporate governance standards and enhance their valuations,” the person said on condition of anonymity.
An email sent to Sebi went unanswered. Spokespersons for Tata Sons, Mahindra Group and Adani Group declined to comment.
In the November directive, Sebi said any transaction worth ₹1,000 crore or 10% of the company’s consolidated revenue would be considered a material transaction, and this should only be done after obtaining shareholder approval.
The regulator also said such transactions, even between two foreign subsidiaries of the company, should be considered material and require shareholder approval.
These standards, if implemented, will complicate the operations of large conglomerates that have multiple global subsidiaries.
They fear that the new standards will hamper day-to-day operations even at the subsidiary level and delay or block the normal functioning of large listed multinationals, the people quoted above said.
The new definition of materiality and transactions with related parties includes the value of orders taken by subsidiaries, temporary guarantees provided by holding companies, intercompany loans, transactions between promoters and subsidiaries abroad, etc.
Sebi wants to tighten the standards so that companies in the promoter group are discouraged from entering into transactions that only benefit them rather than minority shareholders.
Large conglomerates argue that materiality thresholds vary from company to company, depending on size.
“The provision of parent company guarantees to third parties on behalf of subsidiaries is a common occurrence, and customers of subsidiaries/joint ventures expect the parent company to provide such financial guarantees. It may not be possible for shareholders to understand the significance of such business deals, and therefore seeking their approval may not only be meaningless, but may also unnecessarily delay operations,” the company said. first person.
Sebi’s proposal to bring transactions with subsidiaries and between subsidiaries within the framework of related party agreements also meets with opposition from conglomerates.
Even if two unlisted subsidiaries inside or outside India cross the materiality threshold, the shareholders of the listed entity will have to approve such a transaction.
It gets even more complicated if those subsidiaries are based overseas and are governed by their local laws, as Sebi’s latest proposal will essentially place foreign companies under the domain of its registration regulations, the people said.
The requirement to obtain approval for transactions between two foreign subsidiaries of the listed Indian holding company may also constitute a violation of the autonomy of the board of directors of the foreign subsidiary and could be contrary to fundamental principles of international law, according to the Confederation of Indian Industry.
Download the app to get 14 days of unlimited access to Mint Premium absolutely free!