PSU Related-Party Transaction Disclosures Should Match Non-PSUs: IiAS

Public Sector Undertakings (PSUs) need to enhance their disclosures on related party transactions (RPTs) to match the transparency levels of non-PSUs, according to Hetal Dalal, President and Chief Operating Officer (COO) of Institutional Investor Advisory Services (IiAS).

Discussing the differences in RPT disclosures between PSUs and non-PSUs, Dalal noted that PSUs benefit from several regulatory exemptions, including carve-outs introduced in 2024, which are reasonable. However, she emphasized the need for greater alignment with non-PSUs in terms of disclosure practices.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

She made these remarks during the launch of a new portal designed to track and analyze RPTs, highlighting the importance of transparency in corporate governance.

Launch of RPT Tracking Portal

Unveiled on February 14, the portal aims to enhance transparency and corporate governance by providing stakeholders, including retail investors, with access to RPT-related data. The initiative will be managed jointly by three proxy advisory firms:

• Institutional Investor Advisory Services (IiAS)
• InGovern Research Services
• Stakeholder Empowerment Services (SES)

This platform is expected to serve as a crucial resource for monitoring related party transactions and ensuring better regulatory compliance.

SEBI’s Role in RPT Regulations

Dalal reflected on the regulatory history of RPTs, highlighting that the Securities and Exchange Board of India (SEBI) has consistently prioritized transparency in these transactions.

She recalled that, during the evolution of the Companies Act, there was significant resistance to bringing RPTs under regulatory oversight due to conflicting interests. However, a senior SEBI official took the initiative to advocate for stricter regulations by directly engaging with the Ministry of Corporate Affairs (MCA). This move played a key role in ensuring that RPTs came under regulatory scrutiny.

Concerns Over Executive Compensation and Governance

In her speech, Dalal also identified governance issues related to RPTs that require further improvement. She pointed out that executive compensation is currently excluded from RPT regulations, allowing company promoters to grant themselves significant remuneration without shareholder approval.

Referring to an IiAS report published on January 15, 2025, she stated that proxy advisors have urged regulators to mandate a majority-of-minority vote on promoter remuneration to prevent potential conflicts of interest.

Findings from the IiAS Report

The report highlighted a consistent increase in payments to promoters and their families, both in absolute terms and in comparison to median employee salaries. Key findings of 893 remuneration resolutions for promoters presented between January 1, 2023, and September 30, 2024, only 10 resolutions were rejected.
If these resolutions had been subject to a majority-of-minority vote, an additional 216 resolutions (24.5% of the total) would likely have been dismissed.

Call for Stronger Audit Committee Oversight

Dalal also emphasized the need for Audit Committees to go beyond the standard arm’s length principle when evaluating RPTs. Instead, they should assess whether reliance on promoter-related entities is justified and if alternative business structures could be implemented.

She raised concerns about promoters having excessive control over supply chains and distribution networks, questioning whether such structures serve the best interests of the company and its shareholders.

"Audit Committees should not only focus on whether these transactions comply with market terms or arm’s length principles but also consider the operational dependence they create on the promoter group," she said. "This is more of a risk-management concern that needs to be addressed."

The discussion around RPT disclosures, executive compensation, and corporate governance underscores the need for stricter regulatory measures and improved transparency, particularly among PSUs. With the launch of the new RPT tracking portal, stakeholders now have better access to critical data, which could drive accountability and reform in the corporate sector.