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SEBI Tightens Norms for Related Party Transactions

Market regulator SEBI has mandated that all companies must formulate a policy on its dealings with related parties and the materiality of its related party transactions (RPTs).

Transactions (to be entered into individually or taken together with previous transactions during a financial year), are considered material if it exceeds the higher of 5 per cent of turnover or 20 per cent of net worth of the company.
Special resolution

RPTs require the approval of shareholders through a special resolution with related parties not given the right to vote on the transaction. RPTs also require prior approval of the audit committee of the company board.

Companies have to furnish a quarterly report containing details of all material transactions with related parties, along with the compliance report on corporate governance, to the stock exchanges.

Members of the board and key executives should disclose to the board whether they have a material interest in any transaction or matter directly affecting the company. Companies must provide equal treatment to all shareholders, including minority and foreign shareholders, and establish a whistle-blower mechanism, said SEBI.
5-year term for directors

Independent directors will now have a five-year term and can be re-elected only once through a special resolution.

A person, serving as an independent director for five years or more in a company as on October 1, 2014, will be eligible for re-appointment only once.

The person becomes re-eligible for appointment only after a gap of three years of ceasing to be an independent director in the company.

Such persons cannot serve on the boards of more than seven companies. Whole-time directors in a listed company can, however, be an independent director only in three companies. Appointment of a woman director is now mandatory.

The Nomination Committee of the Board has to lay down the criteria for evaluating the performance of independent directors.

This would be done by the entire board, excluding the director concerned, and disclosed in the annual report. Extension of tenure or re-appointment would depend on the performance.

SEBI has also directed the monitoring cell established by stock exchanges to ascertain the adequacy and accuracy of disclosures made in the quarterly compliance reports received by it from companies.

Business Line, New Delhi, 18-04-2014

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