SEBI Tightens Screws On Related-Party Transactions (bloombergquint.

com)

Securities and Exchange Board of India approved several changes to provisions pertaining
to related party transactions, at its board meeting on Sept. 28. These changes will become
effective April 1, 2022, a statement by the regulator said. Though first they have to be
notified to be included in SEBI (Listing Obligations And Disclosure Requirements
Obligations) Regulations, 2015.

Related party transactions may occur in the ordinary course of business but have often been
used to benefit select parties, often promoters or those close to them, at the cost of public
shareholders. Since 2013, company law and SEBI regulation have sought to govern them
more tightly in order to prevent such abuses. Though in some cases, company law has been
relaxed to facilitate ease of doing business, SEBI has continued to maintain higher RPT
thresholds, approval standards and disclosures. These changes continue in that vein.

The SEBI board has approved to expand the definition of related party and related party
transactions. They also expand the scope of shareholder approval of RPTs. Audit committee
oversight has been rationalised, but only in certain cases, and disclosures made more
frequent. The amendments are mostly in keeping with the recommendations of a SEBI
Working Group, submitted in January 2020.

Amendments To Related Party, Related Party Transaction Definitions

The SEBI board has approved expanding the definition of related party to:

All persons/entities in a promoter group (irrespective of shareholding).

Currently any person/entity belonging to the promoter group of the listed entity and
holding 20% or more of shareholding in the listed entity is deemed to be a related party.

But, as the working group had explained, a promoter may exercise control over a company
irrespective of the extent of shareholding. Also, several Indian business are structured as
intrinsically linked group entities that operate as a single economic unit. Hence this change
was necessary to plug any gaps.

Any person/entity holding directly or indirectly a 20% stake in the listed entity in the
immediately preceding year. This falls to 10% or more with effect from April 1, 2023.

The working group cited several other jurisdictions, such as U.K., that treat significant
shareholders as related parties of the listed entity as they may influence company decisions.

The SEBI board has also approved amending the definition of related party transactions. The
existing definition—"related party transaction” means a transfer of resources, services or
obligations between a listed entity and a related party...— 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.
Now RPTs are defined as being transactions between:

 The listed entity/its subsidiaries and a related party of the listed entity/its
subsidiaries.
 The listed entity/its subsidiaries and any person/entity, the purpose and effect of
which is to benefit a related party of the listed entity/its subsidiaries.

The working group, drawing from the recommendations of the Kotak Committee, said it
was needed to regulate the consolidated entity as a whole given that often companies have
multiple subsidiaries, step-down subsidiaries, associates, and joint ventures. "...it's important
for boards to ensure that good governance trickles down to the entire structure," the Kotak
Committee had said.

Audit Committee Approval

All related party transaction currently require prior approval of the listed company board's
audit committee. Given that the new definitions capture many more transactions, the
working group had recommended narrowing the audit committee approvals in certain
cases. Hence, SEBI has approved that RPTs, where the subsidiary is a party but the listed
entity is not, will require the approval of the listed entity's audit committee only if certain
size thresholds are exceeded.

 10% of the consolidated turnover of the listed entity.

 10% of the standalone turnover of the subsidiary (April 1, 2023 onwards).

Materiality Threshold And Shareholder Approval

SEBI's extant regulations mandate company boards to determine a policy on materiality of

RPTs, provided that a RPT exceeding 10% of annual consolidated turnover of the listed
entity shall be considered material.

All material RPTs need the prior approval of shareholders, as per SEBI regulations. Now,
partially adopting the working group's recommendations to expand the scope of
shareholder approval, the regulator has approved amending the definition of material to
include RPTs that cross Rs 1,000 crore or 10% of the consolidated annual turnover,
whichever is lower. To be clear, the working group had recommended materiality threshold
should be amended to 5% of the annual total revenue, total assets or net worth of the listed
entity on a consolidated basis or Rs 1,000 crore, whichever is lower.

Disclosures

More detailed disclosures of RPTs are being mandated, again in keeping with the Working
Group recommendations. Enhanced disclosures to be placed before the audit committee,
provided in the notice to shareholders for material RPTs, and provided to the stock
exchanges every six months.

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related-party-transactions
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