SEBI Proposes Corporate Governance Rules for RPTs in High-Value-Debt Listed Entity

SEBI Proposes Corporate Governance Rules for RPTs in High-Value-Debt Listed Entity

The market regulator Securities and Exchange Board of India (SEBI) proposed corporate governance rules for related-party transactions (RPTs) in a high-value debt-listed entity (HVDLE) with an outstanding value of listed non-convertible debt securities of at least Rs. 500 crore.

In its consultation paper, the regulator has proposed that bondholders be given a copy of any agenda item pertaining to RPTs planned to be taken up in general meetings by HVDLEs.

SEBI introduced Corporate Governance requirements for listed entities to improve transparency in their functioning and ensure enhanced disclosures to investors. Regulations 16 to 27 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) deal with corporate governance requirements for listed entities. They, inter-alia, relate to the composition of Board of Directors, minimum number of meetings to be held per year, code of conduct, submission of compliance certificate, framing and implementing risk management plan for listed entities, constitution of various specialized committees, vigil mechanism, stipulations related to Related Party Transactions (RPTs), etc.

The proposal comes after SEBI received requests from HVDLEs regarding challenges faced by them in complying with the provision of the LODR (Listing Obligations and Disclosure Requirements) Regulations.

Following are the key proposals laid by the Board among others:

1) Applicability-

The said proposal shall be applicable to HVDLEs having:

a) Only listed non-convertible debt securities; and

b) 90% or more of the shareholders in number are related parties

2) Notice to debenture holders-

Where a General Meeting (GM) is to be conducted, in which an agenda item relating to RPTs is proposed to be placed for approval by shareholders, the company shall send 2 a copy of such agenda item to the debenture holders holding listed non-convertible debt securities (hereinafter referred to as 'debenture holders').

3) Response from debenture holders-

Debenture holders shall submit their objection, if any, in writing or through electronic mode to the Company within 7 days from the date of the dispatch of the agenda item. Towards this, the company, shall indicate a dedicated functional email-id to which the responses shall be sent by the debenture holders.

4) Scrutiny of a Practicing Company Secretary (PCS)-

To ensure independent scrutiny of the responses received from the debenture holders, the company shall get the responses scrutinized by a PCS and obtain a certificate from a PCS with respect to the responses received in the aforesaid dedicated functional email ID within 3 days from the last day by which responses from the debenture holders are to be received. The PCS shall indicate the following in the certificate:

a) Total number of responses received from debenture holders;

b) Number of no-objections received from debenture holders; and

c) Number of objections received from debenture holders;

The market regulator stated that the rationale behind such a proposal is to ensure RPTs in listed companies are regulated, as wrongdoings by companies in the past have stemmed from decisions being taken by persons with the ability to influence decisions. Apart from the use of circular transactions, companies appear to have diluted or circumvented the requirements under their policy on RPTs by procuring approvals for continuous lending to group companies. Hence, there is an imperative need to ensure that RPTs of all listed entities are regulated.

It pointed out that shell companies controlled by such persons have been used to siphon off money, thus circumventing RPT norms. Besides, it said, firms have also diluted policies on RPTs by procuring approvals to continuously lend to group companies.

Currently, LODR Regulations provides that the corporate governance norms shall continue to apply to a HVDLE even when the outstanding amount of listed non-convertible debt securities falls below the specified threshold of Rs. 500 crores. But there is no specified period for which a HVDLE shall continue to comply with such provisions, once the outstanding amount of listed non-convertible debt securities falls below the specified threshold of Rs. 500 crores.

Consequently, it has been proposed that regulations, once applied to HVDLEs, shall continue to remain applicable till the outstanding value of its listed non-convertible debt securities reduces and remains below the specified threshold for at least three consecutive financial years.

Following, this SEBI has sought comments on the proposal by 22nd February, 2023.