SEBI at its Board Meeting held on 28th September 2021 reviewed the regulatory provisions pertaining to the Related Party Transactions (RPTs) and approved the amendments to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 [LODR]. These amendments are yet to come into effect as the notification amending LODR is still awaited, however, SEBI has prescribed that the amendments shall come into force from April 1, 2022.
Even though Companies Act, 2013 has granted certain relaxations in respect of compliance with the provisions of RPT (Arm's length basis & ordinary course of business) but SEBI has continued to maintain its stringent hold on the RPT thresholds, approval standards and disclosure requirements. We shall analyse the latest amendments in detail, in comparison with the existing provisions.
Definition of related party has been amended to include all persons or entities forming part of promoter or promoter group irrespective of their shareholding and any person/entity holding 20% or more equity shares in the listed entity (10% w.e.f April 1, 2023) either directly or on a beneficial interest basis at any time during the immediately preceding financial year. Regulation 2 (1) (zb) of LODR defines the term “related party" and provides that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party. With this amendment, the limit of 20% has been removed as all persons/entity forming part of the promoter/promoter group irrespective of their shareholding shall be considered as related party. Thus, the new regime will lead to non-promoter shareholders being classified as “related party" at a later stage, as the 20%/10 % or higher clause kicks in from April 1, 2022/April 1, 2023.
Definition of related party transaction is proposed to undergo major change and w.e.f. 1st April 2022, it shall now include any transaction between :-
- Listed Entity and Related party of listed entity
- Listed Entity and Related party of Subsidiary
- Listed Entity's subsidiary and Related party of Listed entity
- Listed Entity's subsidiary and Related party of Subsidiary
W.e.f. 1st April 2023, it would also cover any transaction, the purpose and benefit of which is likely to flow to a listed entity's related party or its subsidiaries, between:-
- Listed Entity and any other person/entity
- Subsidiary of Listed Entity and any other person/entity
The existing definition of "related party transaction" was viewed as being open to abuse by complex structures or by transactions with seemingly unrelated parties, however intended to benefit related parties and the like. This amendment has been aimed at regulating multiple businesses having multiple subsidiaries, step down subsidiaries, associates and joint ventures. Kotak Committee had even opined that it was important that good governance trickles down to the entire structure. However, this amendment may pose several practical challenges in the sense that any transaction benefiting related party (even indirectly) would need the approval of audit committee and shareholders of a listed company. When the transaction is with the third party but may benefit related party, it may be difficult to identify and can sometimes lead to unnecessary allegations of violation on corporates.
Presently, Regulation 23 (4) stipulates that all material related party transactions shall require approval of the shareholders through resolution. A RPT is considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity. Now, it has been proposed that prior approval of the shareholders would be required for material RPTs having a threshold of lower of Rs. 1000 crore or 10% of the consolidated annual turnover of the listed entity, thus partially accepting Working Group's recommendations to expand the scope of shareholders approval.
A significant change which has been proposed in respect of RPTs where listed entity may not be a party but its subsidiary may be a party subject to the threshold of 10% of consolidated turnover of listed entity w.e.f. 1st April 2022 and 10% of standalone turnover of subsidiary w.e.f. 1st April 2023. As per extant provisions, all RPTs require approval of the Audit Committee, now all subsequent material modifications as defined by Audit Committee would also mandate their approval.
Presently, Regulation 23 (5) stipulates that disclosures of related party transactions has to be submitted to the Stock Exchanges within 30 days of publication of standalone and consolidated financial results for the half year. The amendment proposes to alter the timeline by providing that disclosures has to be made within 15 days from the date of publication of financials and simultaneously with the financials w.e.f. 1st April 2023.
RPTs have always been a contentious issue and even though SEBI has been prescribing stricter norms, there are numerous instances of abuse of RPTs which escape the net in the garb of subsidiaries. The Corporate frauds at Satyam, Jet Airways and tussle between the Indigo promoters dealt extensively with abuse of RPTs.
SEBI Chairman Shri Ajay Tyagi, while addressing the media, had said that related party transactions are misused by many entities in various ways, including for siphoning of funds, and hence there was a need to tighten the framework and safeguard the interest of the minority shareholders. Although the intent is laudable, but this would put immense burden on the Audit Committee as the new regulations have put greater onus on the audit committees of companies to scrutinize RPT's including those specifically involving subsidiaries. Hence, the need of the hour is for the Audit Committee to exercise greater vigilance in scrutinising and approving the Related Party Transactions.
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