Related Party Transactions Regulation 23 of SEBI LODR 2015 & Section 188 of Companies Act 2013

“Understand the regulations governing Related Party Transactions (RPT) in India, covering SEBI LODR 2015 and Companies Act 2013. Explore the legal framework, approval processes, and the significance of compliance. Stay informed for transparent corporate governance. Read more on [Your Website].”

Related Party Transactions (RPT) refer to transactions between two entities that have a close relationship, such as a parent company and a subsidiary, two companies under common ownership, or between companies and their executives or directors. An arm’s length price is the price that would have been agreed upon between independent parties under normal market conditions, without the influence of any relationship between the parties.

Laws governing related party transactions:

• Companies Act, 2013 – Section 177 and 188
• SEBI (LODR) Regulations, 2015 – Regulation 23 read with Schedule V

As per Regulation 2(1) (zb) “related party” means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards.

Provided that:

(a) any person or entity forming a part of the promoter or promoter group of the listed entity; or

(b) any person or any entity, holding equity shares:

(i) of twenty per cent or more; or

(ii) of ten per cent or more, with effect from April 1, 2023;

in the listed entity either directly or on a beneficial interest basis as provided under section 89 of the Companies Act, 2013, at any time, during the immediate preceding financial year, shall be deemed to be a related party.

However, this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s).

As per Regulation 2(1)(zc), related party transaction means a transaction involving a transfer of resources, services or obligations between:

(i) a listed entity or any of its subsidiaries on one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or

(ii) a listed entity or any of its subsidiaries on one hand, and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries, with effect from April 1, 2023;

regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract.

Following shall not be a related party transaction:

(a) the issue of specified securities on a preferential basis, subject to compliance of the requirements under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018;

(b) the following corporate actions by the listed entity which are uniformly applicable/offered to all shareholders in proportion to their shareholding:

i. payment of dividend;

ii. subdivision or consolidation of securities;

iii. issuance of securities by way of a rights issue or a bonus issue; and

iv. buy-back of securities.

(c) acceptance of fixed deposits by banks/Non-Banking Finance Companies at the terms uniformly applicable/offered to all shareholders/public, subject to disclosure of the same along with the disclosure of related party transactions every six months to the stock exchange(s), in the format as specified by the SEBI.

However, this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s).

Under Companies Act, 2013

According to section 2 (76) “related party”, with reference to a company, means –

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager or his relative is a member or director;

(v) a public company in which a director or manager is a director and holds or holds along with his relatives, more than two per cent of its paid-up share capital;

(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act;

 However, nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;

(viii) Any body corporate which is –

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary; or

(C) an investing company or the venturer of the company;

 Explanation. – For the purpose of this clause, “the investing company or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.

(ix) a director other than an independent director or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party.

Transaction covered under SECTION 188 OF COMPANIES ACT, 2013):

Following are the Related Party Transactions and threshold limits as per Section 188 of the Companies Act, 2013 read with rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014:

When will a transaction with a related party be material?

A transaction with a related party shall be considered transaction(s) individually or material be if entered the into to taken together with previous transactions during a financial year, exceeds rupees one thousand crore or 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity, whichever is lower.

With effect from July 01, 2019 a transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed five percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

The SEBI (LODR) Regulations, 2015 require listed entities to comply with additional disclosure and approval requirements for RPTs. Under the regulations, all RPTs must be approved by the audit committee of the company, and a report on RPTs must be included in the company’s annual report. The report must contain details of all RPTs entered during the year, the policy on RPTs adopted by the company, the business rationale for entering into the transaction, and the comparative market price of the transaction.

Policy on materiality of related party transactions:

As per Regulation 23 of SEBI (LODR) Regulations, 2015 every listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions including clear threshold limits duly approved by the board of directors and such policy shall be reviewed by the board of directors at least once every three years and updated accordingly.

NATURE OF APPROVAL REQUIRED

Approval of Audit Committee-

All related party transactions and subsequent material modifications shall require prior approval of the audit committee of the listed entity. However, only those members of the audit committee, who are independent directors, shall approve related party transactions.

Omnibus Approval: Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions-

(a) the audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature;

(b) the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity;

(c) the omnibus approval shall specify:

(i) the name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into;

(ii) the indicative base price / current contracted price and the formula for variation in the price if any; and

(iii) such other conditions as the audit committee may deem fit.

 However, where the need for related party transactions cannot be foreseen and aforesaid details are not available, the audit committee may grant omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

(d) the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given.

(e) Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year.

Approval of the shareholders-

All material related party transactions and subsequent material modifications as defined by the audit committee shall require prior approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.

However, the requirements specified above shall not apply in respect of a resolution plan approved under section 31 of the Insolvency Code, subject to the event being disclosed to the recognized stock exchanges within 1 day of the resolution plan being approved.

Note:

1. Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

2. The members of the company who are related parties to the contract or arrangement may not vote on any resolution to approve the contract or arrangement.

EXCEPTIONS:-

The approval of Audit committee and shareholders shall not be required in the following cases:

(a) transactions entered into between two government companies;

(b) transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval;

(c) transactions entered into between two wholly-owned subsidiaries of the listed holding company, whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

Arm’s length principle states that:

1. The price involved between related parties shall be the same as they are for any outside person or generic person.

2. Auditors suggest transfer pricing when RPTs are involved because it is an important aspect of financial reporting and tax compliance. It is important for auditors to ensure that the prices charged between related parties are in line with the arm’s length principle.

Disclosures under the Companies Act, 2013:

1. Disclosure of RPTs in mandatory in the Board Report as per Section 134 of the Companies Act 2013 in the Form AOC-2

2. Disclosure of the interest by the director in other entities is mandatory under section 184

In conclusion, related party transactions play a significant role in the corporate governance framework under SEBI LODR. By disclosing and monitoring such transactions, companies can ensure transparency, accountability, and fairness. This helps in maintaining investor confidence and protecting the interests of stakeholders. It is crucial for companies to have robust policies and procedures in place to identify, report, and manage related party transactions effectively. Overall, adhering to SEBI LODR guidelines regarding related party transactions promotes good corporate practices and strengthens the integrity of the capital markets.