Despite protectionism, businesses are linked and so are the Global Investors and the Capital Markets. Global Markets and Investors are broadly linked and connected with the common cord of business opportunities, strength of economy, ease of doing business, integrity in the set of rules, predictability of taxes, transparency of compliances etc. Though the protectionism is on rise, the future is set to be more integrated given the commitments of key economies in COP26 and other forums to foster strategic and economic alliances, for re-orienting and re-organizing the rules of the business, centered around the need and for framing joint response to the challenges thrown by climate, supply chain, geo-political disruption.
In India, Market Regulator SEBI is sensitive to the needs of the investors and other stakeholders including Minority Shareholders. SEBI is continuously pursuing its vision and objectives of protecting the minority shareholders interest and promoting reforms for strengthening Indian Capital Market.
SEBI’s recent actions on strengthening disclosures related to Related Party Information (RPT), is an important step in this direction. SEBI has issued circular on November 22, 2021, specifying RPT information which needs to be placed before the Audit Committee.
Audit Committee will review matters related to terms of the proposed transaction, relationship, nature of its concern or interest whether financial or non-financial, value and tenure of the transactions before approving the same. RPT transactions will also be measured from the point of materiality with respect to turnover of the entity. Reviewing and Measuring the value of transactions from the turnover perspective will give an insight into the significance and materiality of the transaction. Further if the transaction involves loans, investment, ICD etc Audit Committee needs to review the source of funding for such transactions. If the transactions are funded through borrowing, Audit Committee needs to review the business rationale of such transactions e.g. interest rate, payment schedule, nature of security, ultimate beneficiary of the transactions etc. Company has to send the notice to shareholders, containing the details of all such information for seeking approval on the proposed RPT.
Earlier on November 9, 2021, SEBI has made significant changes in the RPT rules in line with the recommendations made by the working group on RPT. Amendment will come into force from next F.Y. beginning April 2022. Amendments will fundamentally change the way RPT is recognized. The net is widened to include person/entity belonging to the promoter or promoter group under the definition of related party, including any person/entity holding equity shares, whether directly or through equity shares. Related party transactions are on rise.
Recently SEBI warned Vedanta of executing Rs 1407 crore without Audit Committee approval. RBI Governor Shaktikanta Das has also recently highlighted that RPT’s are on rise and Auditor needs to be careful about it. Jet Airways, DHFL, YES Bank, IL&FS are few examples of numerous cases where prudence of commercial transactions has turned out to be questionable from hindsight and have let to collapse of enterprises. Intent of the SEBI is to enhance the accountability of the Audit Committee through RPT and lay out the clear framework of minimum information that needs to be reported by company to Audit Committee and shareholders.
The role of Audit committee is coming closer to the business and Audit Committee members have to exercise their decision in line with the business rationale, so that it best serves the interest of all the stakeholders. Since Audit Committee is composed of Independent Directors, the role of Independent Director is set to become more challenging and demanding. Corporate failure is subjective and has to be evaluated on case-to-case basis. Whether the business has failed due to business reasons or due to wrong intent of the management, needs an objective analysis. However strong Governance and ethics are non-negotiable. Quality of Governance is one of the key and perhaps most important distinctive feature between the enterprises which have constantly created value for its stakeholders in comparison to the enterprises which have lost investors wealth. SEBI measures will create over-regulation for the companies, which already have a sound governance and proven track records but on a positive side, SEBI measures will also improve the quality of governance and will safeguard investors interest, especially in relations to the companies which needs improvement in the areas of governance. As a result of the RPT related regulations, the Audit Committee role will evolve in times to come and Independent Directors will be needing a more critical review of their contributions in discharging their duties.
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Author: CA Richa Dayal
Richa is a practicing Chartered Accountant. She can be reached at dayal_co@rediffmail.com