Synopsis of Industry Standards on “Minimum Information to Be Provided for Review of The Audit Committee and Shareholders for Approval of Related Party Transaction (RPT)”
In consistent with the regulations with 23 (2), (3) and (4) of the SEBI LODR regulation 2015, prior approval of the audit committee and the shareholders are necessary for approval of Related party transactions by the listed entities. The standards ensures there is an requirement of audit committee and the shareholders to have access to relevant information on RPT’s in terms of nature, terms, potential interest and impact on the listed entity. The standards focus on analysing the clarity of information provided in pursuance of SEBI LODR and SEBI Master Circular. The required information provided in standardised format to be incorporated into the agenda of the audit committee meeting and the comments on RPT to be recorded in the minutes of the meeting. In case of Material RPT, the information as per the standard note to be included in the explanatory statement to the notice being sent to the shareholders. The standard note has been prepared in consultation with SEBI and in case of modifications in standards is inconsistency with the SEBI LODR or SEBI Circular, the latter shall prevail. The standards shall be applicable to the listed entity entered on or after 1st April, 2025 as per the applicability matrix which states the type of transactions, threshold limits, approval and disclosure requirements to be disclosed.
The standards are applicable to Material RPTS as defined in regulation 23 (1) and (1A) of SEBI LODR regulations and any transactions with related party, either entered individual or together with any previous transactions in a financial year exceeds the lower of 2% of turnover, 2% of networth or 5% of average profit or loss after tax from last three consolidated audited financial statements of the listed entity. The applicability matrix focuses on the Material RPT which must be reflected under both Balance sheet and Profit and Loss items with the approval from the Audit Committee and the shareholders with a comprehensive disclosure. For other such RPT’s of involving promoter or promoter group or any such person/entity in which the promoter or promoter group has concern or interest has to be reflected under both Balance sheet and Profit and Loss items, requiring the approval from the audit committee with Comprehensive and limited disclosure depends upon the required threshold exceeds or not. For the Residual RPT’s has to be reflected in both the Balance sheet and Profit and Loss items, where RPT’s exceeding Rs 1 crore requires Limited disclosure and those transactions below Rs 1 Crore require minimum disclosure both requiring approval from the audit committee.
STANDARDS ON MINIMUM INFORMATION TO BE PROVIDED TO THE AUDIT COMMITTEE FOR REVIEW AND APPROVAL (INCLUDING RATIFICATIONS) OF RPTs:
- The management of the listed entity to provide Audit committee with required information while placing any proposal for review and approval of RPT and to provide comments against each information in the format specified to be place before the audit committee, where any such transaction is not applicable.
- Certificates from the CEO/CFO/KMP of the Listed entity and from every director of the Listed entity who is a part of promoter group stating that the RPT being entered not prejudicial to the interest of shareholders, terms and conditions of RPT’s are not unfavourable to the listed entity (in case RPT is material but no certificate is provided by the Promoter/Director to be disclosed), Copy of valuation report/ any other report to be placed before the audit committee.
- The Audited financial statements of the related party to be submitted to the audit committee, if not available, then the related party to certify the financial details for the financial year where the details not available. If the related party follows a different financial year, it needs to be disclosed.
- For payments of royalty, management fees, services fees, etc. to be disclosed and in case of payment of royalty, the listed entity to compare the royalty payments with the minimum of major three industry peers. The format for minimum information to be provided to the audit committee for review and approval (including ratifications) of RPTs is enclosed in the industry standard note for reference.
STANDARDS ON MINIMUM INFORMATION TO BE PROVIDED TO THE SHAREHOLDERS FOR CONSIDERATION OF RPTs:
- The explanatory statement to be there in the notice sent to the shareholders for seeking approval for the RPT, provide on the requisite minimum information in order to enable the shareholders to make informed decisions in consideration with the terms and conditions being favourable to the listed entity.
- The Notice which is sent to the shareholders for approval of Material RPT shall be as per the provisions of Companies Act 2013 and shall include any information to placed before the audit committee, justification on the proposal in the interest of the listed entity, Copy of valuation report/ any other report to be placed before the audit committee, Statement of assessment by the audit committee with relevant disclosures, Audit committee to approve on the redaction of commercial secrets and other information that might effect on the competitive position of the listed entity.
- In case of any sale purchase, or supply of goods or services or any sale, lease, disposal of a subsidiary, any unit, division or an undertaking of the listed entity to review on the bids terms and conditions from unrelated parties fact to be disclosed and in case of no bids received also to be disclosed with justifications and to state on why the RPT bid is beneficial to the listed entity.
- Disclosing on the fact that the audit committee has reviewed the certificates of CEO/CFO/KMP of the Listed entity and from every director of the Listed entity who is a part of promoter group stating that the RPT being entered not prejudicial to the interest of shareholders, any comments of the Board of Directors / Audit committee received, any other information as maybe relevant.
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