SEBI notifies stricter norms for RPTs

CS Vinita Nair | Vinod Kothari & Company November 11 (updated on November 23, 2021)

SEBI in its Board meeting held on September 28, 2021 approved the amendments in RPT
framework that were proposed by the Working Group1 (‘WG’) in January, 2020 relating to
following areas:
• Definition of Related Party;
• Definition of Related Party Transactions (‘RPTs’);
• Thresholds for classification of RPTs as material;
• Process followed by Audit Committee for approval of RPTs;
• Disclosure requirements.

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, 2023 and remaining from April 1, 2022. The listed entities will be
approaching the Audit Committee for prior approval for RPTs proposed to be undertaken w.e.f.
April 1, 2022 before the end of current financial year.

In view of the recent amendment made in Listing Regulations w.e.f. September 7, 2021 the
framework for RPTs is also applicable to a High Value Debt Listed Entity (‘HVDLE’)2.

This write up discusses the key amendments approved by SEBI in the Board meeting held on
September 28, 20213 and notified vide SEBI (Listing Obligations and Disclosure Requirements)
(Sixth Amendment) Regulations, 20214 and immediate actionable, apart from amending the
RPT policy.

1. Definition of Related Party widened:

• All persons or entity belonging to the promoter (P) or promoter group (PG) will be
regarded as related party, irrespective of its shareholding in the listed entity;
• Any person or entity holding, directly or indirectly (on a beneficial basis under Section 89
of CA, 2013), 20% or more of the equity shareholding in the listed entity will be regarded
as a related party;
• Any person or entity holding, directly or indirectly (on a beneficial basis under Section 89
of CA, 2013), 10% or more of the equity shareholding in the listed entity will be regarded
as a related party w.e.f. April 1, 2023

1
https://www.sebi.gov.in/reports-and-statistics/reports/jan-2020/report-of-the- working-group-on-related-party-
transactions_45805.html
2
a listed entity which has listed its non-convertible debt securities and has an outstanding value of listed non-
convertible debt securities of Rupees Five Hundred Crore and above as on March 31, 2021.
3
https://www.sebi.gov.in/media/press-releases/sep-2021/sebi-board-meeting_52976.html
4
https://egazette.nic.in/WriteReadData/2021/230992.pdf

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 The intent is to ensure that none of the related party is able to escape classification on account
of manipulation or active engineering, despite operating as a single economic unit.
Identification as a related party should not be a concern for companies. All persons or entities
belonging to the ‘promoter’ or ‘promoter group’ to be identified, irrespective of their
shareholding in the listed entity.

Further, considering the comments received, citing practical difficulties in computation of

indirect shareholding for the purpose of defining related party, SEBI confined the definition of
related party to any person or any entity, either directly or on a beneficial interest basis.

Immediate actionable for the listed entity will be to revise the list of related parties to include
all persons forming part of promoter group and persons holding 20% or more of the equity
shares in the listed entity directly or on a beneficial basis, in order to identify transactions
currently being undertaken with each of the identified parties.

2. Definition of RPTs covers combination of transactions:

RPT means transaction between:
a. Listed entity and RP of listed entity;
b. Subsidiary and RP of the listed entity; (w.e.f. April 1, 2022);
c. Listed entity and RP of the subsidiary;
d. Subsidiary and RP of subsidiary;
e. Listed entity and any other person/ entity, purpose and effect of which is to benefit a RP
of the listed entity/ subsidiary (w.e.f. April 1, 2023);
f. Subsidiary and any other person/ entity, purpose and effect of which is to benefit a RP
of the listed entity/ subsidiary (w.e.f. April 1, 2023).

RPT as per current provisions:

A is a listed entity; B and C are
its subsidiaries. A1/A2, B1/B2
and C1/C2 are related parties
of A, B and C, respectively

Source: Annexure II of SEBI Meeting file

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RPTs as per present amendment (excluding second part of the recommendations which
refers to transactions with unrelated parties, the purpose and effect of which is, to benefit
related parties of the listed entity:

Source: Annexure II of SEBI Meeting file

Various combinations of transactions included within the ambit of RPTs. It was felt that the
current RPTs regulatory framework is insufficient to cover transactions where the listed entity
could transfer its assets/value to a subsidiary, whether in India or overseas, and such entity
could then transact with the related parties of the listed entity to move the assets out of the
consolidated entity.

Further, in view of certain innovative structures done in the past by entities, SEBI expanded the
definition of RPT to focus on substance over form as a part of good governance practice and to
include circular transactions, camouflaged or masked transactions where the transaction with
unrelated party is merely a pretext or smoke screen. In those cases, the provisions mandate
lifting the veil and seeing the reality. Most of such transactions have immediate nexus; it is for
the listed entity to investigate and identify such transactions.

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 Immediate actionable for the listed entities will be to:
• Procure list of related parties from every subsidiary and identify the ongoing transactions
of the listed entity with the related parties of such subsidiaries;
• 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.
• Procure information about nature and quantum of transactions of the subsidiaries with its
related parties.

3. Exclusions under the definition of RPTs:

In order to ease the compliance burden, following transactions have been excluded from the
purview of RPTs:

(a) 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;
(b) Corporate actions viz. 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 by the listed entity which are uniformly applicable/offered to all shareholders in
proportion to their shareholding.
(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 Board.

The exclusion in (c) above was not recommended in the report of the WG. Ideally, a similar
carve should have been extended in relation to transactions with insurance companies where
the policy/ premium rates are on terms uniformly applicable to all policyholders/ public.

Further, considering that law provides a specific exclusion list of transactions that will not be
regarded as RPTs, whether a listed entity can expand the exclusion list by excluding managerial
remuneration, CSR related, scheme of arrangement related transactions? One interpretation
could be that in view of statutory carve outs, law prohibits further carve outs. Refer our article5
analyzing various carve outs provided by listed entities in its RPT policy.

5
Transacting by exception: Listed entities in India give substantive carve out for RPTs

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4. Prior approval of shareholders for material RPTs and material modifications
The WG had recommended quite stringent threshold for determination of a Material RPT:
Material RPT = transaction(s) to be entered into individually or taken together with
previous transactions during a financial year, exceeds:
• Rs.1,000 crore; or
• 5% of the annual total revenues on a consolidated basis; or
• 5% of total assets on a consolidated basis;
• 5% of net worth on a consolidated basis;
• as per the last audited financial statements of the listed entity,
• whichever is lower.

However, SEBI has approved a comparatively simpler criteria i.e. Rs. 1000 crore or 10% of
annual consolidated turnover of the listed entity, whichever is lower.

As per the present amendment, prior approval of shareholders is also required for material
RPTs and material modifications to such RPTs. The shift from post to prior approval has been
to avoid the possibility of shareholder rejecting at a later stage.

With respect to the requirement of related parties not voting to approve the transaction, the
requirement is intact. While, Reg. 23 (7) stands omitted, the said restriction is provided in Reg.
23 (4). The difficulty in case of high value debt listed entities that are closely held, has not
been resolved yet. Ideally, the carve out available under Section 188 of CA, 2013 should
be incorporated here as well.

Immediate actionable for listed entities will be:

• 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, in order 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
• Further, given the amended definition of RPTs, it is important to ascertain if the
transactions of the listed entity with a related party and transactions of the subsidiary of the
listed entity with the same related party are required to be aggregated at the listed entity’s
level.
• Audit Committee to determine and define threshold for material modification, which needs
to be included in the RPT Policy. Basis the said definition, the listed entity to ascertain if
there has been any material modification in the RPTs already approved by the

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 shareholders, requiring prior approval.

5. Exemption from prior approval of shareholders for material RPTs

In addition to the existing exemption available in case of material RPTs between (a) two
government companies and (b) 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, following material RPTs will not require prior approval of
shareholders of the listed entity:
• Transactions entered into between two wholly-owned subsidiaries of the listed holding
company (i.e. two fellow WOS), whose accounts are consolidated with such holding
company and placed before the shareholders at the general meeting for approval;
• Transactions between a listed subsidiary (meaning equity listed or a high value debt listed
entity) required to comply with Reg. 23 and a related party of the listed entity or a related
party of such listed subsidiary, provided the listed entity is not a party to the transaction.
• Transactions between unlisted subsidiary of a listed subsidiary (i.e. step down subsidiary
of the listed entity) and related party of the listed entity or related party of such
subsidiary, provided the listed subsidiary seeks prior approval of the shareholders.

6. More RPTs will be subject to review by Audit Committee (AC)

Significant RPTs by subsidiaries undertaken with a related party other than the listed entity
itself, will require prior approval of AC of the parent listed entity unless the subsidiary itself
is an equity listed entity or a high value debt listed entity and required to comply with Reg.
23.

Significant RPTs by an unlisted subsidiary of a listed subsidiary (i.e. step down subsidiary of the
listed entity) undertaken with a related party other than the listed entity itself, will require prior
approval of the AC unless already approved by AC of the listed subsidiary.

Significant RPT = Transaction’s value whereof (whether entered into individually or taken
together with previous transactions during a financial year) exceeds:
• 10% of the consolidated turnover as per the last audited financial statements of the listed
entity;
• 10% of the standalone turnover as per the last audited financial statements of the
subsidiary (w.e.f. April 1, 2023).
Further, all RPTs and subsequent material modifications, as defined by AC and inserted in
RPT Policy, will require prior approval of AC;

In addition to the existing exemption available in case of transactions between (a) two
government companies and (b) 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, following transactions (even if a Significant RPT) will not require
prior approval of AC of the listed entity:

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

7. Disclosure of RPTs under Reg. 23 (9)

Presently, the timeline is as under:
• For equity listed entities: within 30 days from the date of publication of date of
publication of its standalone and consolidated financial results for the half year;
• For HVDLE: along with the standalone financial results for the half year (on ‘comply or
explain’ basis till March 31, 2023).

SEBI has approved stricter timeline for equity listed entities.

• With effect from April 1, 2022: Within 15 days from the date of publication of
standalone/ consolidated financial results for the half year.
• With effect from April 1, 2023: Simultaneously along with the financials.

Further, SEBI has prescribed a format6 for the same vide Circular dated November 22, 20217.
The aforesaid Circular provides the format for disclosure of RPTS relating to loans, inter-
corporate deposits, advances or investments made or given by the listed entity. While listed
banks have been exempted from disclosing the said transactions, they will still be required to
disclose FDs accepted from RPs at terms uniformly applicable to all shareholders/public.
Presently, the same is required to be disclosed in the format prescribed in the applicable
accounting standards. The carve out from the definition of RPT for acceptance of fixed deposits
by banks/Non-Banking Finance Companies at the terms uniformly applicable/offered to all
shareholders/public, is available subject to disclosure of the transactions in the half yearly
disclosures submitted under Reg 23 (9). Earlier, the accounting standard allowed non-
disclosure of such information which is prohibited in a statute or by a regulator or competent
authority governing the entity. In case of banks the accounting standard could not override the
obligation to preserve the confidentiality of the customer’s dealings. Similar provision has not
been provided in LODR. Given the other disclosure related exemptions extended to banks
under Schedule V w.r.t. loans and advances, it should also be available in this case.

6
https://www.sebi.gov.in/sebi_data/commondocs/nov-2021/Annexure%20-%20I%20-%20Circular-
%20Disclosure%20obligations%20of%20listed%20entities%20in%20relation%20to%20RPTs_p.PDF
7
https://www.sebi.gov.in/legal/circulars/nov-2021/disclosure-obligations-of-listed-entities-in-relation-to-related-party-
transactions_54113.html

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 8. RPT disclosure in CG Report
• RPT disclosure under Para A of Schedule V is now mandatory only for entities with listed
non-convertible securities.
• Disclosure of loans and advances in the nature of loans to firms/companies in which
directors are interested by name and amount, will be required to be made by listed entity
and its subsidiaries. The requirement is not applicable in case of banks. Considering the
amendment becomes effective from April 1, 2022 the said information will be required to
be furnished in the CG report for FY 2022-23.
• Further, the entities exempted under Section 186 (11) of CA, 2013 will also be required to
disclose the same. As per the SEBI Board Meeting file, ‘director’s interest’ will have the
meaning given in Section 184 of CA, 2013

9. Amendment notified by way of Circular

1. Enhanced disclosure before AC for prior approval for RPTs
As per the WG report and the SEBI Circular dated November 22, 20218, following enhanced
disclosures will be required to be placed before the AC:
• Type, material terms, particulars of RPT, name of related party and relationship;
• Tenure of proposed RPT – cannot be indefinite or open ended;
• Value of proposed RPT – with upper limit and aggregate value and time period (in case
of recurring or continuous transaction);
• Value of proposed RPT vis-à-vis percentage of the listed entity’s annual total revenue,
total assets and net worth, on consolidated basis;
• Value of proposed RPT vis-à-vis percentage of the subsidiary’s annual turnover on
standalone basis;
• In case of financial transactions, following to be disclosed
▪ disclosure of source of funds in connection with the proposed RPT;
▪ nature of indebtedness, cost of funds, tenure;
▪ applicable terms and purpose for which the funds will be utilized by the ultimate
beneficiary
• Justification how the RPT is in the interest of the listed entity;
• Copy of Valuation report or other external report relied upon;
• Percentage of counterparty’s annual consolidated turnover, that is represented by the
value of the proposed RPT (voluntary).
• Status of long-term (more than one year) or recurring related party transactions on an
annual basis.

2. Reasoned disclosure in the explanatory statement

As per WG Report, which have now been prescribed under the above-mentioned SEBI
Circular, following additional information are required to be furnished in the explanatory

8
https://www.sebi.gov.in/legal/circulars/nov-2021/disclosure-obligations-of-listed-entities-in-relation-to-related-party-
transactions_54113.html

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 statement annexed to notice being sent seeking approval for any proposed material RPT.

• Summary of the information provided by the management of the listed entity to the audit
committee;
• Recommendation of AC justifying how the RPT is in the interest of the listed entity. (The
WG Report additionally required to state whether the approval of AC was unanimous, not
included in the circular);
• In case of financial transactions, following to be disclosed
o disclosure of source of funds in connection with the proposed RPT;
o nature of indebtedness, cost of funds, tenure;
o applicable terms and purpose for which the funds will be utilized by the ultimate
beneficiary;
o Valuation report or external report, if any, relied upon by the listed entity (as per WG
Report was required to be made available at registered office for inspection,
however, as per the circular, the same to be made available through the registered
email address of the shareholders);
o Percentage of counterparty’s annual consolidated turnover, that is represented by the
value of the proposed RPT (voluntary).

Read our other articles on the subject at https://vinodkothari.com/article-corner-on-related-

party-transactions/

Other Corporate Law articles: http://vinodkothari.com/corporate-laws/

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