SEBI Proposes Corporate Governance Norms For High Value Debt Listed Entity

Capital markets regulator SEBI on Wednesday proposed corporate governance norms pertaining to Related Party Transactions (RPTs) for a high-value debt-listed entity, with an outstanding value of listed non-convertible debt securities of at least Rs 500 crore.

In its consultation paper, the Securities and Exchange Board of India (SEBI) has suggested the need to review the LODR Regulations, relating to RPTs and shareholders' approval for such related party transactions.

The proposal comes after the regulator received requests from high value listed debt entities (HVLDEs) regarding challenges faced by them in complying with the provision of the LODR Regulations that deals with corporate governance requirements for listed entities.

Such corporate governance norms are related to the composition of board of directors, minimum number of meetings to be held per year, framing and implementing risk management plan for listed entities, constitution of various specialized committees and stipulations related to Related Party Transactions (RPTs) among others.

In its presentations, such entities told SEBI that their shareholding is substantially held by one or a few shareholders, which are related parties. When these HVDLEs enter into related party transactions (RPTs), they are required to obtain the approval of the majority of the shareholders who are not related parties.

Such shareholders, who are not related parties, either hold a negligible portion of the equity or none at all, in which case the entity will not be able to transact such RPTs because of 'impossibility of compliance' with the provisions of LODR Regulations. Accordingly, SEBI felt the need to address the issues faced by HVDLEs.

High Value Debt Listed Entity (HVDLE) is a listed entity which has listed its non-convertible debt securities and has an outstanding value of listed non-convertible debt securities of Rs 500 crore and above.

For HVDLEs, where 90 per cent or more shareholders in number are related parties, SEBI has suggested that proposal, relating to RPTs to be placed for approval by shareholders, should be applicable to HVDLEs having only listed non-convertible debt securities; and 90 per cent or more of the shareholders in number are related parties.

If 'objections' are received from the debenture holders holding 75 per cent or more in value, based on the number of responses received, then the board of director should ensure that the agenda item pertaining to RPTs is withdrawn.

SEBI observed that one common factor in major corporate wrongdoings was that they were allegedly carried out by persons with the ability to influence the decisions of the company. Shell or apparently unrelated companies, controlled directly or indirectly, by such persons were purportedly used to siphon off large sums of money through the use of certain innovative structures, thereby circumventing the regulatory framework of RPTs.

Apart from the use of circular transactions, companies appear to have diluted the requirements under their policy on RPTs by procuring approvals for continuous lending to group companies.

In addition, SEBI proposed that once the regulations become applicable to a HVDLE, they should continue to remain applicable till such time the outstanding value of listed non-convertible debt securities of such entities reduces and remains below the specified threshold for a period of three consecutive financial years. Further, outstanding amounts may be re-viewed on the last day of every financial year.

Currently, Listing Obligations and Disclosure Requirements (LODR) Regulations provide that the corporate governance norms should 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 crore.

However, there is no specified period for which a HVDLE should continue to comply with such provisions, once the outstanding amount of listed non-convertible debt securities falls below the specified threshold.

SEBI has sought comments from the public till February 23 on the proposals.