The new disclosure standards for related party transactions (RPTs), aimed at transparency and better governance, are being seen as compliance burdens by consultants and auditors. At the same time, some believe these norms will help audit committees and stakeholders make informed decisions.
Last week, the Industry Standards Forum (ISF), consisting of Assocham, Ficci and CII, in consultation with SEBI, formulated standards of minimum information to be provided to shareholders and audit committees for approval of a related party transaction, effective April 1.
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The new format requires companies to detail 88 items before audit committees for approval. According to Vinod Kothari, managing partner, Vinod Kothari & Company, the standard introduces an information overload for companies to present to their audit committees. “Considering that most companies take a number of items to their audit committees and shareholders for an omnibus approval, giving copious details, item-wise, for every proposed transaction will increase the paperwork manifold.”
He added that given that audit committees have several agenda items to cover, their attention span will be limited, and the downside is that the form starts overriding the substance and attention may be diverted from criticality.
Ishan Jain, who specialises in internal audit, believes that having too many compliances can be a burden. “Due to the nature of these transactions, audit committees and shareholders should have all relevant information to make an informed decision.” He noted that the approval is required only for material transactions.
A related party transaction is considered material if it exceeds 10% of a company’s annual turnover or is more than Rs 100 crore, whichever is lower. Disclosures are also applicable to transaction exceeding 2% of turnover, 2% of net worth, 5% of the average of absolute value of profit or loss and when it exceeds Rs 1 crore.
“The new disclosure format will make related party transactions more difficult and time consuming,” said Anurag Nahata, senior manager at PKF Sridhar & Santhanam LLP.
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“Approval of related party transactions is always the judgement call of the audit committee, and moving from the subjective, contextual and item-specific discretion of the audit committee to a one-size-fits-all format has the prospect of the baby being thrown out with the bathwater,” Kothari said.
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