Sebi may not relax new corporate governance norms

Mumbai: The Securities and Exchange Board of India (Sebi) is unlikely to relax the newly framed corporate governance norms which come into effect from 1 October, even though listed companies have sought concessions on related-party transactions and the appointment of women directors, according to two people familiar with the matter.

Corporate governance norms for listed firms come under listing agreement norms of Sebi.

“Every company approaching Sebi for relaxation is being told to comply with the norms before the deadline. Their demand is to ease the norms and make them similar to those in the new Companies Act and nothing additional,” said one of the people cited above, declining to be identified.

“The government has already issued four circulars in the last two months diluting the corporate governance requirements. Now the listed firms are asking Sebi also to dilute the requirements. Apart from relaxations sought on norms on number of women directors, companies have asked for relaxations on related-party transactions,” said the person, adding that Sebi cannot keep diluting its norms.

In February, Sebi had tightened corporate governance norms for listed companies in an effort to improve transparency in their transactions and give minority shareholders a bigger say in management decisions. As part of the new norms, all related-party transactions are to be approved through a special resolution. While Sebi’s norms were an extension of provisions already introduced in the new Companies Act, some of these provisions have since been diluted. One such change was in the definition of the term ‘related party’, where it was clarified that the term “in the above context refers only to such related party as may be a related party in the context of the contract or arrangement for which the said special resolution is being passed.”

At present, related-party relationships exclude key managerial personnel of the parent company. However, under the new Sebi norms, such personnel, too, will likely be considered related parties. Also, joint ventures, co-ventures and co-associates will be brought within the definition of a related party.

“Sebi has framed related-party transactions norms on the basis of accounting standards. So, it is wide and so, more transactions will be covered under related-party transactions as defined by Sebi,” said the person. He added that companies are seeking a relaxation of norms that require prior approval from an audit committee for related-party transactions and also asking for a relaxation of the definition of material related-party transactions. Sebi’s threshold for a material related-party transactions is set lower than what is set under the Companies Act.

“The new norms may mean more cumbersome paperwork but it is something followed by companies across most of the developed countries and we have to move towards it,” said Amit Tandon, CEO, IIAS, a proxy advisory firm, adding that the rules will help prevent unfair transactions.

According to Capitaline, a corporate database, 7,029 related-party transactions in listed firms took place in fiscal 2014. The largest included one worth Rs.75,121.10 crore in Reliance Industries Ltd, and a Rs.49,348.77 crore transaction in Tata Consultancy services Ltd.

While strict norms are needed to prevent opaque transactions between related parties, some provisions can be relooked at, said Nikhil Singhi, partner, Singhi & Co, a chartered accountant member firm of Baker Tilly International.

“The primary responsibility and consequential strict penal clauses should rest with the promoters and executive directors. The independent directors need to be involved, however the onus and responsibilities cast on them and the consequential penal provisions in my view should be rationalized,” said Singhi.

Additionally, several companies have asked Sebi to relax the norms on the number of women directors required on the board. According to Indianboards.com, a joint initiative of the National Stock Exchange (NSE) and Prime Database, as on 19 August, of about 1,469 NSE-listed firms, boards of 776 companies did not have a woman director.

“There are about 6,000 listed firms in India. And about 1,000 woman directors were required to be appointed over the past one year. Companies keep claiming that they are competing with international firms. If a company cannot find 1,000 right people in one year, how can you claim to be even competent. If the intention is right, it is not hard for companies to find the right people on the board. So, it is not fair to demand an extension from Sebi on the deadline,” Tandon said.

Despite many requests from firms to relax the new norms or extend the deadline, the two people said that Sebi cannot make any change in the new norms unless the board decides to do so. “Only if the next board meeting happens before 20 September, Sebi can issue any circular regarding any change in the new norms or its deadline,” said the person.