Sebi panel recommends shareholders’ nod for royalty payment

New Delhi: To improve corporate governance at listed companies, a high-profile Sebi panel has recommended payments made by such entities to related parties for usage of brand and royalty should need approval from majority of non- promoter shareholders.

In case, where royalty payout levels exceed 5% of consolidated revenues, the panel headed by eminent banker Uday Kotak suggested the terms of conditions of such royalty must require shareholders’ approval.

The committee has recommended that “payments made by listed entities with respect to brands usage/royalty amounting to more than 5% of consolidated turnover of the listed entity may require prior approval from the shareholders on a ‘majority of minority’ basis”.

Currently, there is no specific provisions pertaining to payments made pertaining to brand and royalty to related parties.

A transaction involving payments made to a related party with respect to brand usage or royalty should be considered material if the transaction to be entered into individually or taken together with previous transactions during a financial year, exceeds 5% of the annual consolidated turnover of the listed entity.

The panel on corporate governance, which submitted its report to the Securities and Exchange Board of India (Sebi) on Thursday, is of the view that creating checks and balances on related party transactions are crucial for good governance.

In order to strengthen transparency on related party transactions, the committee has recommended that companies should disclose such transactions once every six months and strict penalties should be imposed by Sebi for failing to make such disclosures.

It also suggested that all promoters/promoter group entities that own 20 per cent or more in a listed company should be considered ‘related parties’. In addition, the committee recommended disclosures of transactions with promoters or promoter group entities holding 10% or more annually and on a half yearly basis (even if not classified as related parties).

The committee proposed for a transparent framework to regulate the information rights of certain promoters and significant shareholders in order to reduce subjectivity and provide clarity for ease of business and to prevent any abuse and unlawful exchange of unpublished price sensitive information.

Capital markets regulator has sought public comments till November 4 on the panel’s recommendations, which run into 177 pages and covers a host of issues.