Clarification on applicability of regulation 23 of SEBI LODR Regulations- Related Party Transactions

Clarification on applicability of regulation 23 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 in relation to Related Party Transactions

The Securities Exchange Board of India has clarified on the new norms governing related party transactions that will come into effect from April 1 2022 vide Circular No. SEBI/HO/CFD/CMD1/CIR/P/2022/40.

The regulator clarified that listed companies need not seek fresh approval from the shareholders for a related party transactions (RPT) that has been approved by audit committee and shareholders till March 31.

Regulation 23(8) of the LODR Regulations specifies that all existing material related party contracts or arrangements entered into prior to the date of notification of these regulations and which may continue beyond such date shall be placed for approval of the shareholders in the first General Meeting subsequent to notification of these regulations.

An RPT that has been approved by the audit committee prior to April 1, which becomes material as per the revised materiality threshold should be placed before the shareholders in the first general meeting held after April 1.

In the revised rules, the regulations has widened the ambit of related party transactions to include materiality threshold for seeking shareholder’s approval, requirement to take approval for transactions between two foreign subsidiaries of the listed Indian holding company and change in the definition of related party owing to ownership among others.

Where revised materiality threshold under recent amendment in SEBI LODR Regulations, 2015 is –

A transaction with a related party shall be considered material, if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds rupees one thousand crore or ten per cent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity, whichever is lower.

It is reiterated that an RPT for which the audit committee has granted omnibus approval, shall continue to be placed before the shareholders if it is material in terms of Regulation 23(1) of the LODR Regulations.

Further, The explanatory statement contained in the notice sent to the shareholders for seeking approval for an RPT shall provide relevant information so as to enable the shareholders to take a view whether the terms and conditions of the proposed RPT are not unfavorable to the listed entity, compared to the terms and conditions, had similar transaction been entered into between two unrelated parties.

The notice being sent to the shareholders seeking approval for any proposed RPT shall, in addition to the requirements under the Companies Act, 2013, include the following information as a part of the explanatory statement:

a. A summary of the information provided by the management of the listed entity to the audit committee;

b. Justification for why the proposed transaction is in the interest of the listed entity;

c. Where the transaction relates to any loans, inter-corporate deposits, advances or investments made or given by the listed entity or its subsidiary, (The requirement of disclosing source of funds and cost of funds shall not be applicable to listed banks/NBFCs.)

d. A statement that the valuation or other external report, if any, relied upon by the listed entity in relation to the proposed transaction will be made available through the registered email address of the shareholders;

e. Percentage of the counter-party’s annual consolidated turnover that is represented by the value of the proposed RPT, on a voluntary basis;

f. Any other information that may be relevant.