With an aim to strengthen the regulatory norms and address corporate governance issues relating to Related Party Transactions (RPT), SEBI has broadened the spectrum of related party in SEBI (Listing obligations and Disclosure Requirements) regulations 2015 vide its notification SEBI/LAD-NRO/GN/2021/55 also called as Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021. The amendments were mostly recommended by the working Group constituted by SEBI in November 2019 comprising members from the Primary Market Advisory Committee (PMAC).
These amendments made applicable in phased manner coming into effect from 1st April 2022 and 1st April 2023 respectively.
We are substantially covering here the amendment which shall be applicable from 1st April 2023 keeping in mind the changes done w.e.f. 1st April 2022 w.r.t. Change in definitions, thresholds of material transactions, enhanced role of Audit committee, Shareholders Approval on RPT and stock exchange disclosures along with the rationale behind this paradigm shift in the RPT approval and disclosures requirement.
1. Definition of Related Party:
Regulation 2 (1) (zb): all parties covered under section 2 (76) of the Companies Act 2013 or under the applicable accounting standards.
However SEBI vide its notification SEBI/LAD-NRO/GN/2021/55 has introduced deeming fiction in the definition of related party resulting into inclusion of promoters in the arena of Related Party in order to ensure appropriate disclosure.
Accordingly, the following parties shall be deemed as related party in accordance with the aforesaid amendment;
1. any person or entity forming a part of the promoter or promoter group of the listed entity; or
2. any person or any entity holding equity shares :
a) of 20% or more ; or
b) of 10% or more, e.f. 1st April 2023
in the listed company either directly or through its beneficiaries as mentioned under section 89 of the Companies Act 2013 at ANY TIME during the immediate preceding Financial Year.
Exceptions: Units of Mutual funds which are listed on the Stock exchange are exempted from the aforesaid definition.
Rationale behind the amendment:
1. SEBI ICDR 2018 defines a “promoter” as a person who has control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or otherwise or in accordance with whose advice, directions or instructions, the board of directors of the issuer is accustomed to act. Further, a significant percentage of Indian businesses are structured as intrinsically linked group entities that operate as a single economic unit, with the promoters exercising influence over the entire group. Thus, promoter or promoter group may exercise control over a company irrespective of the extent of shareholding.
2. There is also a possibility of a shareholder not being classified as a promoter but may be exercising influence over the decisions of the listed entity by virtue of shareholding.
2. Definition of Related Party Transactions:
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;
Note: Transactions with RP shall be considered as single transaction and group of transaction irrespective of the price charged.
Furthermore, the following shall not be construed as related party transaction:
|Sr. No.||Particulars||Compliance (if any)|
|1.||Issue of Specified securities on Preferential Basis||SEBI (ICDR) Regulations 2018|
|2.||Corporate Actions such as Payment of dividend, subdivision or consolidation of securities, rights issue, Bonus issue and buy-back of securities.||–|
|3.||Acceptance of FD by banks/NBFC at the terms uniformly applicable/offered to all shareholders/public.||Disclosure of the same shall be made to the Stock Exchange in every six month.|
This definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange.
Rationale behind the amendment:
1. It was observed that certain innovative structures have been used, in the past, to avoid classification of transactions as RPTs, thereby avoiding regulatory compliance and disclosure requirements. In order to address the issues, the definition was proposed to be broadened to include transactions which are undertaken, whether directly or indirectly, with the intention of benefitting related parties.
2. Further, to ease the compliance burden, it was proposed to exempt corporate actions from the purview of RPTs which are subject to procedures specifically laid down by SEBI in its other regulations and which are uniformly applicable to all shareholders.
3. Threshold Limit of Material Transactions:
In accordance with the explanation given under Regulation 23(1) of SEBI (LODR) Regulation 2015, 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 Rs.1000 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. (Applicable w.e.f. 01.04.2022)
Rationale behind the amendment:
It was felt that some high value transactions in absolute terms may not get covered under the existing materiality threshold. It was also noted that in international jurisdictions, benchmarks other than turnover such as assets have been used to define the materiality threshold. Therefore the above changes brought by SEBI Working Group.
4. Approval requirements of the Audit Committee:
SEBI vide this amendment notification enhanced the role of Audit Committee and incorporated a new paragraph in sub regulation 2 of regulation 23 in SEBI (LODR) Regulation 2015 vide SEBI (Listing Obligation and Disclosure Requirements) (Sixth Amendment) Regulations w.e.f. 1st April 2014.
In accordance with Regulation 23(2) of SEBI (LODR) Regulation 2015, all related party transactions and subsequent material modifications shall require prior approval of the audit committee of the listed entity.
Independent Directors of the Audit committee shall approve related party transactions.
Provided further that:
1. The Audit Committee of the listed entity is authorised to formulate Policy on materiality and delineate the material modifications.
2. Prior approval of the Audit committee of the Listed Company is required where the transactions has been done in the listed subsidiary of Listed Company individually or taken together with prior transactions during a FY and the same exceeds 10% of Annual CONSOLIDATED Turnover regardless of the Listed Entity being party of the said transactions.
3. From 1st April 2023, transactions where listed subsidiary of the Listed company is party and the latter is not a party will require the prior approval of Audit committee of the Listed Company if the transaction value exceeds 10% of the Annual STANDALONE turnover individually or taken together with Prior transactions during the FY.
(Expl. The Turnover shall be calculated on the basis of last audited financial statements of the listed entity.)
4. Transactions where listed subsidiary is a party and Listed company is not party and Regulation 23 w.r.t. RPT & Regulation 15(2) w.r.t. compliances with Corporate Governance provisions is applicable to the listed entity then aforesaid prior approval of Audit committee is not required.
Explanation: For related party transactions of unlisted subsidiaries of a listed subsidiary as referred above, the prior approval of the audit committee of the listed subsidiary shall suffice.
5. Approval requirements of the Shareholder:
SEBI has given relaxation from approval requirement for related Party transactions of listed subsidiary where listed entity is not a party and Regulation 23 w.r.t. RPT & Regulation 15(2) w.r.t. compliances with Corporate Governance provisions is applicable to the listed entity. The same is introduced by SEBI through incorporating a proviso after sub regulation 4 of Regulation 23 of SEBI (LODR) regulations 2015 w.e.f. 1st April 2022.
In accordance with regulation 23 (4) of SEBI (LODR) Regulations 2015, all material related party transactions and subsequent material modifications [as defined by the audit committee under sub-regulation (2)] 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:
The aforesaid prior approval of the shareholders of a listed entity shall not be required for a related party transaction to which the listed subsidiary is a party but the listed entity is not a party, if regulation 23 and regulation 15(2) are applicable to listed subsidiary.
Explanation: For related party transactions of unlisted subsidiaries of a listed subsidiary as referred above, the prior approval of the audit committee of the listed subsidiary shall suffice
Exemption: The requirements specified under this sub-regulation 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 one day of the resolution plan being approved.
Rationale behind the amendment:
As a general matter, while the LODR specifically requires prior approval of the audit committee, the word “prior” is not used for shareholder approval. In order to maintain consistency, it was recommended that the word “prior” may be added for shareholder approval as well.
It was observed that an exception from taking approval of the shareholders of the parent listed entity (subject to materiality thresholds) should be given for listed subsidiaries, since they are independently subject to the LODR framework on RPTs.
6. Exemption on Certain Categories of Company:
(a) transactions between two government companies;
(b) Transactions 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 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. (Applicable w.e.f. 01.04.2022)
Rationale behind aforesaid exemption
1. In line with the exemption given to transactions between a holding company and its wholly owned subsidiary from the requirements of audit committee and shareholder approval, it is felt that transactions 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, should be similarly exempt from such requirements.
7. Filing Requirements:
The Listed entities are required to intimate the stock exchange disclosures of Related Party Transactions in the format specified by the Board from time to time, on half yearly basis on the date of publication of its standalone and consolidated financial results with effect from April 1, 2023. (Earlier it was within 15 days from the date of publication of financial results.)
Rationale behind amendment:
There was no consistency in RPT disclosures, being made to the stock exchanges, across listed entities and with a view to address issue of asymmetry in information due to varied reporting formats, the need was felt to standardize the same through a prescribed format.
It was also found that the details of all RPTs would already be available with the listed entity when the financial results are announced; accordingly, the listed entity should be able to disclose details of RPTs in the prescribed format on the same day of publication of financial statements.
Conclusion: Though it is a legal obligation and responsibilities of the Companies to disclose all its related party transactions, the changes brought by SEBI has strengthen the monitoring and compliance of the Listed Companies and it will also reduce the unnecessary influence of majority shareholders / promoters / promoter groups in order to save the interest of other stakeholders. These amendments will overhaul the corporate governance w.r.t. RPT and will provide clarity to ease some of the compliance i.e. exemption given to Preferential issues and other corporate actions which are uniformly applicable/offered to all the shareholders. The said amendments shall definitely bring practical challenges but at the same time it will provide more transparency in transactions entered between related parties and make listed entities more accountable and answerable to prospective non compliances.
2. Report of the Working Group on Related Party Transactions