SEBI proposes corporate governance norms for High Value Debt Listed Entity (HVDLE)

  • Background
  • Capital markets regulator SEBI proposed corporate governance norms with regard 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, SEBI 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 i.e., SEBI received plenty of requests from high value listed debt entities (HVLDEs) regarding troubles faced by them in complying with the provisions of the LODR Regulations that deals with corporate governance required for listed entities.

  • Problem
  • In its presentations, 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.

  • Proposed Amendments
  • For HVDLEs where 90% or more shareholders in numbers are related parties and HVDLEs have only listed non-convertible debt securities, the following course of action is suggested:
  • Notice to the debenture holder: where a General meeting is to be conducted, in which an agenda item pertaining to RPT is proposed to be placed for approval by shareholder, the company shall send a copy of such agenda item to the debenture holder holding listed debt securities.
  • Debenture holder shall submit their objections, if any, in writing or electronic mode to the company within 7 days from the date of the dispatch of the agenda item.
  • To ensure independent scrutiny of the responses received from the debenture holder, the company shall get its response scrutinized by a Practicing Company Secretary (PCS) and obtain a certificate from PCS with respect to responses received. The PCS shall indicate in certificate, total number of responses received, number of objections received, and number of no-objection received.
  • If no response is received from the debenture holder, then PCS shall provide a certificate to that effect. It will be presumed that debenture holder does not have any objection and the proposal of such RPTs shall be placed before shareholders in the GM for approval.
  • If objections are received from the debenture holder holding 75% or more in value, based on the number of responses received the company shall indicate to the shareholder that the proposed agenda item on RPTs is withdrawn.
  • 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 Limit for a period of three consecutive financial years. Moreover, outstanding amounts may be re-viewed on the last day of every financial year in order to follow LODR.

SW Remark:

The SEBI has provided this proposal to resolve the problem faced by HVDLEs to approve the RPTs as per Regulation 23 of SEBI (LODR) 2015.

Muskan Rawat, Audit Associate, SW

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