Gain a comprehensive understanding of Related Party Transactions (RPT) with this complete overview. Explore definitions, approval mechanisms, disclosure requirements, and exemption criteria under SEBI LODR and Companies Act, 2013.
DEFINITIONS:
–
RELATED PARTY TRANSACTION (RPT) [AS PER LODR]:
TRANSACTION INVOLVING A TRANSFER OF RESOURCES, SERVICES OR OBLIGATIONS BETWEEN:
- w.e.f. 01/04/2023: Any above party if enters transition with any unrelated party, the purpose and effect of which is to benefit a related party of the LE or its sub, the same shall deemed to be RPT.
- All aforesaid shall deemed to be RPT regardless whether price is charged or not.
- RPT shall consist of all single/ group of transaction under contract
- Exemption to RPT: 1. Issue of Securities on Pref issue basis pursuant to ICDR Reg. 2. Corporate Action uniformly applicable/ offered to all shareholders such as: Dividend, sub-division/ consolidation of sec., right/bonus issue, buyback.
Reg 23(01):
- LE to formulate Policy on Materiality of RPT and on dealing with RPT.
- Policy to have clear threshold limit duly approved by Board.
- Policy be reviewed by Board once in every 3yr.
- Transaction be considered Material if crosses threshold given on Pg. 5.
Reg 23(02): PRIOR APPROVAL OF AUDIT COMMITTEE:
> All RPT & subsequent material modification thereon shall require prior approval of AC;
> Only ID members of AC shall approve above;
> AC to define Material Modification disclose in Materiality policy;
Reg 23(03): OMNIBUS APPROVAL:
AC may grant Omnibus Approval (OA) subject to below conditions:
> AC to lay down criterial for OA;
> AC shall satisfy itself that NEED is Foreseen for such RPT;
> OA shall specify: Name of RP, Nature, period, max amt of RPT, indicative base price, such other terms
> If Need of OA is not foreseen max amt of RPT not to exceed 1cr.
> AC to review RPT on Quarterly basis for which OA is granted;
> OA be valid only for 1 Yr.
Reg 23(04): PRIOR APPROVAL OF MEMBERS:
> All Material RPT & Subsequent Material Modification thereon, shall require Prior Approval of Shareholders through resolution;
> No related party shall vote to approve such material RPT;
> No approval of members for RPTs in which Listed Subsidiary is party but LE is not a party;
> Prior approval of members is not required in respect of a resolution plan approved under section 31 of the Insolvency Code, sub to event being disclosed to SE within 1 day of approval of such resolution plan;
Reg 23(05): EXEMPTION:
Sub Reg 2,3 & 4 of Reg 23 shall not be applicable in transaction between:
> Two Govt Companies;
> Holding & its WOS → a/c are consolidated with holding Co → placed before GM of holding co for members approval;
> Two WOS of the Listed Holding Co → a/c are consolidated with Listed Holding Co → placed before GM of holding co for members approval.
Note : “Government Company(ies)” means Govt co as defined in sub-section (45) of section 2 of the Companies Act, 2013
APPROVAL MECHANISM PURSUANT TO SEBI LODR:
| SR. NO. | PARTY AT ONE HAND | WHETHER
MATERIAL |
PARTY AT OTHER HAND | APPROVAL REQUIRED | ||
| AUDIT
COMMITTEE |
BOARD | MEMBERS
|
||||
| 1 | Listed Entity | Not Material | Related Party of | Prior | Not Required | Not Required |
| 2 | Listed Entity | Material | Listed Entity | Prior | Required | Required |
| 3 | Subsidiaries | Not Material | RP of LE/
Subsidiaries |
Prior | Not Required | Not Required |
| 4 | Subsidiaries | Material | RP of LE/ Subsidiaries | Prior | Required | Required |
| 5 | Transaction which are repetative in nature | Omnibus | Not Required | Not Required | ||
23(9) FILING OF PERIODIC RETURNS:
*HVD LE: High Value Debt Listed Entity
Transaction covered under Section 188:
SECTION 188 OF COMPANIES ACT, 2013):
| 188 (1) | Transactions | Audit Committee | Board Approval | Member’s Approval By Ordinary Resolution |
| a) | sale, purchase or supply of any goods or materials; | Required | Required | If exceed 10% of Turnover |
| b) | selling or otherwise disposing of, or buying, property of any kind; | Required | Required | If exceed 10% of Turnover |
| c) | leasing of property of any kind; | Required | Required | If exceed 10% of Turnover |
| d) | availing or rendering of any services; | Required | Required | If exceed 10% of Turnover |
| e) | appointment of any agent for purchase or sale of goods, materials, services or property; | Required | Required | |
| f) | such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and | Required | Required | |
| g) | underwriting the subscription of any securities or derivatives thereof, of the company: | Required | Required |
DISCLOSURE REQUIREMENTS FOR RPT:
OTHER PROVISIONS OF SECTION 188:
BOARD’s APPROVAL:
> No approval in case transaction is in Ordinary course of business & at arm’s length basis.
> Approval of Board is required for RPT only at the meeting of Board. The agenda of such BM should contain below:
(a) the name of the RP and nature of relationship;
(b) the nature, duration of the contract and particulars of the contract or arrangement;
(c) the material terms of the contract or arrangement including the value, if any;
(d) any advance paid or received for the contract or arrangement, if any;
(e) the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
(f) whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
(g) any other information relevant or important for the Board to take a decision on the proposed transaction.
> If director is interested → not be present at meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.
MEMBER’s APPROVAL:
√ If member is RP shall vote on such resolution.
√ No, approval if 90% or more members, in number, are relatives of promoters or are related parties.
√ No approval in case transaction is in Ordinary course of business & at arm’s length basis.
OTHER TERMS OF PROVISION:
√ Disclose in Board’s report (AOC-2) to the shareholders along with the justification for entering into such contract or arrangement.
√ Any RPT not approved by Board/ Members within 3 months, such contract or arrangement shall be voidable at the option of the Board or shareholders
√ if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it
√ Co may proceed ahead for recovery of any losses from such Director or Employees
EXEMPTION FROM APPROVAL OF MEMBERS/ BOARD:
√ If the Transaction is in Ordinary Course and at Arms length;
√ If 90% or more members, in number, are relatives of promoters or are related parties;
√ In case WOS, the resolution passed by the holding company shall be sufficient for the purpose of entering into the transaction between the wholly owned subsidiary and the holding company.
Author Bio
