Recent regulatory changes to be introduced by the Securities and Exchange Board of India (SEBI) will benefit good corporate governance standards in Indian companies, according to Fitch Ratings.
The agency says that SEBI is tightening the rules governing related-party transactions (RPT) and easing the delisting process. The revised RPT norms will widen the scope of scrutiny and limit the ability of large shareholders – often the founder family or promoters – to enter into RPTs without the approval of minority shareholders. This should strengthen the corporate governance of listed companies, comments Fitch.
The delisting changes should facilitate greater transparency and more effectively balance the interests of acquirers and public shareholders and also result in quicker execution. However, the impact on credit profiles will depend on the funding and capital structures after privatisation and the effects these will have on the linkages between various entities in each group.
Effective from April 2022
The key changes to RPT norms, to be introduced in April 2022, include expansion of the definitions of a related party and an RPT; a tighter threshold for RPTs requiring prior approval of minority shareholders; and enhanced reporting requirements. “We believe the amendments will help to plug the holes in the existing framework that have allowed major shareholders to access cash and assets of a listed subsidiary through RPTs at the expense of minorities,” adds Fitch.
A related party will include all persons or entities forming part of the promoter group irrespective of shareholding. Previously, only promoter entities holding more than 20% stake were considered related parties. Also, non-promoter entities with more than 20% stake (before April 2023) and 10% stake (from 1 April 2023) will be considered related parties.
The definition of RPTs will include transactions with any non-related party with effect from April 2023, if its purpose is to benefit a related party, which Fitch believes will reduce the use of complex entity structures that seek to circumvent the rules. Other changes include amending the minimum threshold for RPTs requiring prior approval of minority shareholders to a value of INR10bn or equivalent to 10% of the consolidated sales of a listed entity, whichever is lower.
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