SEBI

SEBI Amends Provisions On RP and RPTs

Recently the Securities Exchange Board of India notified of sweeping changes in order to strengthen the monitoring and enforcement of norms related to the Related-Party Transactions (RPTs). In the board meeting, SEBI approved the amendments in the related party framework proposed by the Working Group. In this article, we shall discuss the amendments notified by the SEBI.

Amendments made by the SEBI pertaining to RPTs

SEBI has made changes in the following areas:

• Definition of Related Party;
• Definition of Related party Transactions;
• Thresholds for the classification of related party transactions as material;
• Process followed by the Audit Committee for the approval of RPTs;
• Disclosure Requirements.

Let’s look at these amendments one by one.

Definition of Related Party-

Under the new rules, SEBI stated that the related party will refer to any person/entity belonging to promoter or promoter group of the listed entity.

Besides, any person/entity, directly or indirectly holding 20% or more of the holding in the listed entity during the preceding fiscal and 10% or more with effect from April 1, 2023,  shall be regarded as a related party.

Definition of Related party Transactions-

The definition of Related party Transactions have also been redefined to expand and clarify its ambit. Effective from 1^st April 2023, related party transactions will now be transactions between the listed entity/its subsidiaries and a related party of listed entity/its subsidiaries; the listed entity/its subsidiaries and any person/entity, the purpose and effect of which is to benefit the related party of the listed entity/its subsidiaries.

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 part of the practice of good governance and to include circular transactions, camouflaged or masked transactions wherein the transaction with the unrelated party is just a pretext. In those cases, provisions provide for lifting the veil and seeing the reality. Most of those transactions have immediate nexus, the listed entity should investigate and identify such transactions.

Transactions excluded from the definition of RPTs-

The following transactions have been excluded from the definition of RPTs:

• Issue of specified securities on preferential basis, subject to the compliance of the requirements provided under SEBI (Issue of Capital & Disclosure Requirements) Regulations 2018^[1];
• Corporate actions viz- payment of dividend; subdivision or consolidation of securities; issuance of securities through rights issue or bonus issue and buy back of securities by listed entity which are uniformly applicable/offered to shareholders in proportion to their shareholding.
• Acceptance of fixed deposits by banks/NBFCs at the terms uniformly applicable/offered to shareholders/public subject to the disclosure of the same with the disclosure of RPTs every 6 months to the stock exchange(s).

Thresholds for the classification of related party transactions as material-

A prior approval from the shareholders of the listed entity is required for material RPTs with a threshold of lower than 1k crore rupees or 10% of the consolidated annual turnover of the listed entity. Until now, a transaction with a related party was considered material if it exceeded 10% of the annual consolidated turnover of listed entity.

Any subsequent material modification to the RPT will have to be approved by the audit committee and shareholders.

Process followed by the Audit Committee for the approval of RPTs-

Significant RPTs by subsidiaries undertaken with a RP apart from the listed entity itself will require a prior approval of audit committee of the parent listed entity unless the subsidiary is an equity listed entity or is a high value debt listed entity.

Significant RPTs by unlisted subsidiary of a listed subsidiary undertaken with a RP apart from the listed entity itself will require prior approval of the audit committee of the parent listed entity unless already approved by the audit committee of the listed subsidiary.

Disclosure Requirements-

Disclosure of RPTs under Reg. 23(9)-

In case of equity listed entities, with effect from 1 April 2022, disclosures should be made in 15 days from publication date of its standalone and consolidated financial results for the half year. With effect from 1 April, 2023, disclosure should be made simultaneously with publications of its standalone & consolidated financial results for the half year.

Conclusion

The Related Party Transaction Framework is expected to have a better governance structure with these changes. RPT norms need better control and governance to protect the minority shareholders interest and the SEBI has sought to strengthen the monitoring and enforcement of norms related to the Related-Party Transactions (RPTs). Please note that certain amendments will be effective from April 1, 2022, and remaining from April 1, 2023.

Read our article:Related Party Transactions under SEBI (LODR) Regulations 2015