On March 30, 2021, the Securities and Exchange Board of India notified the SEBI (Stock Brokers)...
In a company, whether listed or unlisted, public or private, companies, during the course of their business, enters into different transactions with more than one party, including its related parties. Having transactions with related parties is standard norm of any business. Considering the relationship, related parties can enter into different transactions that unrelated parties would not. Transactions entered with related parties involves various concerns hence the regulator has introduced transparency for related party transactions under SEBI. In this article, we shall discuss the concept of related party, applicable provisions, compliances etc.
It refers to transactions that a company does during its business with parties related to it. In other words, it refers to a deal, or an arrangement between two parties joined by a pre-existing business relationship/common interest. Companies like to get business deals with such parties with whom they have a familiarity or enjoy common interest.
Such transactions are legal in nature however they can create conflict of interest or such other issues.
The relevant regulations are as follows:
|Companies Act 2013||Section 188 & Section 177 of the Act|
|Rules||Companies (Meetings of Board & its Powers) Rules, 2014|
Listed companies are additionally governed by SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015.
(zb) of SEBI (LODR) says that related party is a person or an entity that has related control over the other party or exercises significant influence over the other party, directly or indirectly to the Company.
Parties are considered to be related in case where a party has the ability to, in making financial and/or operating decisions and includes a person or a close member of such persons’ family who is related to a company in case that person is a related party under section 2(76) of the Companies Act, 2013, which in reference to a company means:
Related party is not prohibited under the Companies Act 2013 or under Securities. However, regulations lays down the conditions as a measure of safety which has to be followed by the companies when dealing with the related party transactions.
As far as the main emphasis of the regulations are concerned, transparency in dealings and required disclosures to be made to the board members and shareholders are crucial elements.
The following are the actions:
As it is a mandatory requirement under LODR regulations, the company must formulate policy on RPT for the company. It will help in strengthening the corporate governance framework and would reflect the value of the company, and stakeholders would want to get associated with the company. Such policy should lay down the objective, scope, procedure, identification of RPTs.
The Company Secretary must work with the board members, CFO and ensure to bring out the robust policy in order to meet the regulatory needs. The CS also ensures that the compliances are complied with.
The CFO is responsible for planning, implementing and running the finance related activities of the company. Therefore the CFO is required to ensure that adherence is made to all provisions of the Companies Act 2013 read with Schedule III of the Companies Act and also with the provisions of SEBI (LODR) Regulations, 2015 and reference to the accounting standards applicable. Further take care in ensuring compliance with especially identifying RPTs, examining if is on arm’s length basis or otherwise.
The Audit Committee has to regulate and determine RPT under Companies Act 2013 and under the SEBI (LODR) Regulations, 2015. The audit committee must design the company’s control procedure internally for RPT.
The main objective of having policy on related party transactions under SEBI is to ensure reporting of transactions as applicable between the company and its related party without any prejudice. It will help in bringing transparent quality information to all stakeholders as the approval process is put in place by listed companies.
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