AMENDMENTS TO SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015, IN RELATION TO REGULATORY PROVISIONS ON RELATED PARTY TRANSACTIONS (RPT’S)

SEBI (Securities Exchange Board of India) in its Board meeting held on September 28, 2021, approved the amendments in RPT (Related Party Transactions) framework that were proposed by the Working Group1 (‘WG’) in January 2020 relating to the following areas:

• Definition of a Related Party.
• Definition of Related Party Transactions (‘RPTs’).
• Thresholds for classification of RPTs as material.
• Process to be followed for approval of RPTs.

The notification amending SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) has been issued on November 9, 2021. Certain amendments to come into force from April 1, 2022 and remaining from April 1, 2023.

In this article, we have summarized below amendments made under regulation and their implications on the companies covered by the regulation mentioned above.

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Following changes are made effective from April 01, 2022: –

Amendment in Definition of Related Party [Regulation 2(zb)]: –

• any person or entity forming a part of the promoter or promoter group of the listed entity irrespective of its shareholding shall be deemed to be a related party.

Before amendment, 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 was a related party.

• Further any person or any entity, holding equity shares of twenty per cent or more 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 immediately preceding financial year shall be deemed to be a related party.

This clause is added

Here, they have not specified that whether if any person is holding 20% or more in listed entity either together with another related person or entity shall deemed to be related party or not. Also have not specified when such person or entity has Diluted/ Dispose of its holding from 20% or more in listed entity then whether such person/entity ceases to be related party of the company or not.

*Further criteria of holding of 20% of equity shares by any person or entity will get reduced to 10% or more with effect from April 01, 2023.

Amendment in Definition of Related Party Transaction [ Regulation 2(zc)]:

1. Related party transaction” means a transaction involving a transfer of resources, services or obligations between:

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

Before amendment, related party transaction refers to a transfer of resources, services or obligations between a listed entity and a related party, 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.

After amendment, it covers the following set of transactions between: –

1. Listed entity and related party of listed entity.
2. Subsidiary and related party of listed entity.
3. Listed entity and related party of subsidiary.
4. Subsidiary and related party of subsidiary.

Prior to amendment, related party transaction refers to transfer of resources, services, or obligations between parties now amendment also covers such transactions which involves transfer of resources, services, or obligations between parties. It states that transaction may not directly transfer resources, services, or obligation but transaction is designed as such that eventually reflects the same is also getting covered.

By this amendment, SEBI have broadened the scope of transactions which will be covered as related party transactions. Thus, it is required procure list of related parties from every subsidiary and identify the ongoing transactions of the listed entity with the related parties of such subsidiaries; and, to Furnish list of related parties of the listed entity to every subsidiary and procure information on the nature and quantum of ongoing transactions of the subsidiaries with the related parties of the listed entities.

**Also, with effect from April 01, 2023 following transactions will also be covered: –

• Listed entity and any other person/entity, purpose, and effect of which is to benefit a related party of the listed entity/subsidiary
• Subsidiary and any other person/entity, purpose, and effect of which is to benefit a related party of the listed entity/subsidiary

2. Further they have given a list of certain transactions which will not be covered as related party transactions which are as follows: –

• The issue of specified securities on a preferential basis, subject to compliance of the requirements under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.
• The following corporate actions by the listed entity which are uniformly applicable/offered to all shareholders in proportion to their shareholding:

1. payment of dividend.
2. subdivision or consolidation of securities.
3. issuance of securities by way of a rights issue or a bonus issue; and
4. buy-back of securities.

• 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 Board:

Changes for ascertaining value of material transaction with related party [ Regulation 23(1)]: –

Under regulation 23(1) it is stated that the 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:

“Provided that 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.”

Earlier listed entity has the power to formulate policy on materiality of related party transaction transactions including clear threshold limits duly approved by the board of directors. A transaction with a related party were considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds ten percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

Now even if policy has approved certain limit to define material transactions which is above limit specified under regulations it will not have any effect as it would be termed as material transaction. However, listed entity can prescribe lower limit in their policy than limit specified in regulations.

Hence it is necessary for the listed entity to ensure the following: –

• To identify if there are any ongoing RPTs of the listed entity with its related party that are below 10% of annual consolidated turnover, however, above Rs. 1000 crore.
• To procure details of ongoing RPTs between a) the subsidiary and its related party and b) between the subsidiary and the related party of the listed entity, to ascertain if any of (a) or (b) aggregates to either 10% of the annual consolidated turnover of the listed entity or Rs. 1000 crore.
• To procure list of related parties from the subsidiaries and ascertain if there are any ongoing RPTs of the listed entity with the related party of the subsidiaries that are either above 10% of annual consolidated turnover of the listed entity or above Rs. 1000 crore

Prior Approval of RPT by Audit Committee [ Regulation 23(2)]:

Now with effect from January 01, 2022, only those members of the audit committee, who are independent directors, shall approve related party transactions. Also, subsequent material modifications to the same will require prior approval of the Audit Committee. Regulations provides that audit committee shall define material modifications.

Earlier all related party transactions were required to obtain prior approval of the audit committee.

Prior approval of shareholders for material related party transactions [ Regulation 23(4)]:

1. 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.

Before amendment, prior approval from shareholders was not required for material related party transactions.

Now when transaction crosses limit specified under regulation 23(1) for which prior approval from audit committee is obtained will also require to obtain prior approval of shareholders.

2. Further they have given list of certain transactions which will not require prior approval from shareholders which is as follows: –

1. 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 sub-regulation (2) of regulation 15 of these regulations are applicable to such listed subsidiary.
2. Transactions entered 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.
3. For related party transactions of unlisted subsidiaries of a listed subsidiary as referred above, the prior approval of the shareholders of the listed subsidiary shall suffice.

Disclosure of Related Party Transactions under Reg. 23(9) in format prescribed by SEBI

• ‘High value debt listed entity’ shall submit such disclosures along with its standalone financial results for the half year:
• listed entity shall make such disclosures every six months within fifteen days from the date of publication of its standalone and consolidated financial results

Before amendment listed entity was required to submit within 30 days from date of publication of its standalone and consolidated financial results for the half year, disclosures of related party transactions on a consolidated basis, in the format specified in the relevant accounting standards for annual results to the stock exchanges and publish the same on its website.

• Further with effect from April 1, 2023, listed entity shall make such disclosures every six months on the date of publication of its standalone and consolidated financial results

Conclusion

SEBI has broadened the definition of related party and related party transactions to cover more transactions and has introduced stringent compliances for approval of related party transactions.

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