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How fairness of opinions can help to improve India’s Related Party Transactions?




Related Party Transactions refers to the dealings between parties who work with an existing relationship or a common motive. Due to the arising concerns posed by the conflict of interests and abuse of power in transactions, the Securities and Exchange Board of India has enforced some measures in the Companies Act along with the SEBI, listing Obligations and Disclosure Requirement Rules to prevent the misuse of power possessed by agents. Thus, in order to protect the interests of the shareholders it is quite imperative to note the laws being governed by a Related Party Transaction. Thus, in this article, we will be looking into the ways the existing framework can be modified based on fairness opinions provided by Independent Financial Advisors. As these IFAs fall into the picture to fill the gaps that remain evident even after the recent amendments initiated under the SEBI Regulations.


Referring to the 6th Amendments of the SEBI LODR Regulations, where SEBI Modified the Criterion for materiality in terms of securing the endorsement of shareholders for RPTs under Regulation 23(1A) and 23(2)(b) of the SEBI LODR. Thus, one of the most important aspects of this amendment has been initiated with the focus on ensuring the added responsibilities of the Audit Committee under Section 177 of the Companies Act and Rule 6 and 7 of the Companies Rules 2014.


Usage of fairness in the relevant areas of Related Party Transactions-


The use of fairness has been initiated in various steps which can be understood as;

  • Usage of Fairness Reports to avoid undervalue of transactions- The first issue, in this case, deals with the company undervaluing the transaction. As it cannot be labelled as a material for getting approval from the circumvented shareholder. Thus, in order to ensure the same, it becomes quite necessary for the company to obtain opinions from IFAs about the case of fairness involved with the valuation of transactions.

  • Using Fairness Reports to deal with issues relating to Independent Directors- The second issue with independence, expertise, and workload of Independent Directors has been witnessed by the fact that they do not possess the requisite experience or skills to perform the monitoring function. Even if it is assumed that the same issue is dealt with under Section 177 where lies a requirement of the Independent Directors appointed under the Audit Committee to have the ability to read and understand the financial statements. However, the issue of the Independent Directors having too many duties are already making the case more difficult for them to efficiently perform the added functions.

  • How RPTs have benefitted Corporate Legal Governance? Thus, an important element of corporate governance in any company is to demonstrate the legal efficiency of related-party transactions conducted on an arm’s length basis. Generally Related Party Transactions have attracted the attention of regulators, auditors, and management which are currently facing increasing scrutiny from independent directors and shareholders. Independent Directors consulting the audit committees generally recognize their enhanced responsibility and accountability to ensure Related Party Transactions on an arm length basis on the regular courses of business.

However, despite multiple regulations, there remains an unease over the relevance of Regulated Party Transactions. As Regulators are struggling to find out the right balance to satisfy some contradictory objectives of any RPT Regulation, which can be understood as;

  • Protection of the interests of Stakeholders from abusive Regulated Party Transactions.

  • Facilitate the ease of doing business by disproportionately not increasing the compliance burden upon companies.

Thus, understanding from the point of fairness of opinions, it is quite well evident that the management of companies needs to satisfy the independent directors whereby all related parties and users of RPTs must be identified. In that case, due process of ensuring the nature of the arm’s length is to be followed by sufficient relevant documents that need to provide all material information explanations. Thus, it will also enable all independent directors to provide a timely approach for dealing with Regulated Party Transactions.


Sources referred

 

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