SEBI’s informal guidance offers temporary escape from impossibility

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– HVDLE guided to explain and not comply!

Anushka Vohra | Manager (corplaw@vinodkothari.com)

Introduction

Recently, SEBI rolled out stricter corporate governance (CG) norms for entities having its non-convertible debt security listed and having an outstanding value of Rs. 500 crore and above as on March 31, 2021 [referred as  High Value Debt Listed Entities (HVLDEs)[1]]. One of CG norms applicable is to comply with the requirements that apply with respect to Related Party Transactions (RPTs). The approval requirement, stipulated for material RPTs mandates approval of shareholders and prohibits related parties to vote to approve the transaction. The intent of the law is to ensure approval by shareholders who are not related parties. As HVDLEs include private companies and closely held public companies that must have listed its debentures, this requirement resulted in an impossibility and deadlock. On being approached by one such entity, SEBI suggested a temporary carve out by advising ‘to explain’ and ‘not comply’.

On December 16, 2021, SEBI issued an informal guidance[2] under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) relating to the applicability of CG requirements on HVLDEs.

Pursuant to the fifth amendment of the Listing Regulations, notified on September 07, 2021[3], the applicability of CG norms were extended to entities with non-convertible debt securities listed and the outstanding amount being Rs. 500 cr or more. While the provisions became applicable from September 07, 2021 the same was implemented on a ‘comply or explain’  basis until March 31, 2023. Accordingly, an HVDLE is expected to endeavour to comply with the provisions and achieve full compliance by March 31, 2023. In case the HVDLE is not able to achieve full compliance with the provisions, till such time, it shall explain the reasons for such non-compliance/ partial compliance and the steps initiated to achieve full compliance in the quarterly compliance report filed under clause (a), sub-regulation (2) of regulation 27 of these regulations.

RPTs by HVDLEs

An HVDLE, that were not equity listed, were only required to comply with Companies Act, 2013 (CA, 2013) requirements for the purpose of transacting with related parties. While CA, 2013 also provides for similar restrictions, it provides a carve out in case of closely held companies. The restriction of related parties not to vote in favor of a resolution, does not apply where ninety per cent. or more members, in number, are relatives of promoters or are related parties. However, there is no such carve out provided in Regulation 23 (4) of the Listing Regulations.

The present case

India Infradebt Limited (IIL), a joint venture company and an HVDLE, realised about this deadlock situation as all the shareholders, being venturers, were related parties in terms of Section 2 (76) of CA, 2013. Therefore, it approached SEBI seeking informal guidance for the procedure to be followed for obtaining shareholders’ approval in case of material RPTs.

 SEBI provided a stop-gap solution and stated that in view of the ‘inherent difficulty’ by IIL in getting shareholders’ approval for material RPTs, it may choose to explain the reason for not complying.

Conclusion

A pertinent question that arises from the informal guidance and which has not been dealt with, is whether the HVLDEs that are closely held companies, be expected to be on the same pedestal as that of equity listed entities. Even if they are supposed to be, it cannot continue to explain for not complying as from April 1, 2023 these provisions will become mandatory and violation of the same will attract penalties from the stock exchanges.

Further, the RPT provision has been drastically amended and becomes effective from April 1, 2022[4]. The scope of related party and RPT has been widened and the threshold for material RPT has also been amended to impose a numerical threshold of Rs. 1000 crore along with the existing threshold of 10% of annual consolidated turnover. Additionally, the requirement to seek shareholder’s approval will be ‘prior’ to breaching the materiality thresholds.

Therefore, several HVDLEs may be required to seek shareholder’s approval for prospective transactions. SEBI should consider incorporating a carve out similar to that provided under CA, 2013 for closely held HVDLEs in Regulation 23 (4) of the Listing Regulations in order to resolve the issue permanently.

[1] Refer our write up at https://www.moneylife.in/article/bond-issuers-facing-disproportional-compliances-on-corporate-governance-as-sebi-move-nullifies-mca-exemption/65132.html

[2] https://www.sebi.gov.in/sebi_data/commondocs/dec-2021/SEBI%20Informal%20guidance%20letter%20to%20India%20Infradebt%20Limited%20-%20December%2016,%202021.pdf

[3] https://www.sebi.gov.in/legal/regulations/sep-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-fifth-amendment-regulations-2021_52488.html

[4] Refer our write up here:https://vinodkothari.com/article-corner-on-related-party-transactions/

Round-up of regulatory updates during 2021

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We have attempted to collate all major regulatory amendments notified throughout the year, with our resources on the same. Below we present a regulatory round-up for the year 2021, be it for MCA, SEBI, RBI or the like, along with the links to our major articles/ FAQs on the same.

Our youtube video giving a quick view on the same can be accessed at – https://www.youtube.com/watch?v=WJbJx2jgK9A

This version: 4th December, 2021

New Materiality Threshold for RPTs: Nagging questions on shareholder approval

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Vinita Nair and Sikha Bansal

Related Party Transactions (RPTs) are perceived as potential tools for unjust enrichment of those in fiduciary capacity. Hence, the stock market regulator has recently revamped RPT norms (most of which are to take effect from 1st April, 2022 though) intending to have a greater scrutiny on RPTs. Among all the measures, one is revision in threshold for ‘materiality’, and second is, ‘prior’ approval of shareholders for all such material RPTs. Materiality is now fixed as a value above – (i) INR 1000 crores, or (ii) 10% of annual consolidated turnover of the listed entity, whichever is lower. For all such contracts which cross the threshold, the listed entity would need to have prior shareholder consent. Additionally, the scope of RPTs now also covers cross-RPTs, that is, transactions of listed entity with related parties of subsidiary, transactions of subsidiary with related parties of listed entity, and transactions of subsidiaries with its own related parties.

Given the above, all companies which have annual consolidated turnover exceeding INR 10000 crores, alongside contracts exceeding INR 1000 crores, are now faced with a quizzical issue: Do the amendments impact only future contracts or even past contracts? The question becomes perplexing as to continuing contracts because of the wide ramifications which can possibly occur if the contract fails to get favour from shareholders (which of course, would be unrelated shareholders). Further, there would be questions, relating to scope of transactions to be included to determine the threshold limit (especially because of expanded scope of RPTs), and the computation and aggregation of values thereof.

We intend to address these nagging questions in our write up below.

Tripling effect: ‘cross-RPTs’, ‘lower materiality threshold’ and ‘prior approval’

SEBI has made amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’), vide the SEBI (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021 (‘amendment’).

The changes, which we are discussing here, are three-fold, as below:

First, SEBI felt that it is prudent to obtain “prior” approval of shareholders for material RPTs; this is on account of the practical difficulties which the listed   entity   may   face   in case the  transaction   is   rejected by the shareholders at a later stage. Further, this would ensure consistency with  the   requirement   of   obtaining   prior   approval   of   the   audit committee for all RPTs as specified in the regulations.

Second, and rather more importantly, as the threshold for determining materiality has changed (many companies would have transactions falling in the the bracket of INR 1000 crores), one is left to think if ongoing RPTs need to be reclassified as material and non-material; and if such classification is required, whether the RPT now classified as material RPT would need ‘prior’ shareholder approval.

The question of retrospective application to ongoing contracts arises because of reg. 23(8), which states, “All existing material related party contracts or arrangements entered into prior to the date of notification of these regulations and which may continue beyond such date shall be placed for approval of the shareholders in the first General Meeting subsequent to notification of these regulations.” Of course, reg. 23(8) has been in place right from the time LODR was notified; however, the expression ‘these regulations’ would refer to LODR as amended from time to time. The regulation, so far, has not been omitted.

Pursuant to the same, if it is concluded that a reclassification is required and consequently, all RPTs categorised as material RPTs have to pass shareholders’ nod before proceeding further, the same may have wide ramifications. The company would have entered into an ‘agreement’; the agreement would require both parties to execute their part of obligations under the agreement. The agreement would also include, as a part of default covenants, damages, etc. for breach of agreement. Hence, failure to have shareholders’ approval may have commercial implications on the company, along with ancillary consequences.

Here, note that there are certain other provisions in LODR which seem connected and may be relevant – one is proviso to reg. 1(2) which says that provisions of reg. 23(4) shall come into force on the date of notification of these regulations, and the other is reg. 23(6) which says that the provisions of this regulation shall be applicable to all prospective transactions. All these provisions, at the first stance, seem to be conflicting and overlapping (however, see below).

Thirdly, as regards expanded scope of RPTs to cover cross-RPTs, it might be possible that threshold limits get crossed because of cross-RPTs not considered earlier. While it is likely that the listed entity may have an existing approval in place for the transactions undertaken with its own related parties, but there is a rare probability of an approval being in place for cross-RPTs (considering the cases where there are no overlaps between the related parties of the listed entity and those of the subsidiary). Further, there would be ‘aggregation’ issues for such cross-RPTs, as we discuss further.

Understanding ‘transaction’ vs. ‘contract’ and implications under RPT framework

One would note that regs. 23(1), 23(4), and 23(6), all use the expression ‘transaction/s’; however, reg. 23(8) uses the word “contracts or arrangements’. What could be the relevance of such different usages? Essentially, ‘transaction’ and ‘contract’ are not one and the same. There may be a single transaction or a series of transactions pursuant to a contract or arrangement. As per the definition of RPT in LODR, a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract. Therefore, the term ‘contract’ is wider or an umbrella term within which there can be a single transaction or even a series of transactions resulting in transfer of resources, service or obligation by a listed entity. For instance, A sells goods to B at a certain price – this is a transaction; and this can as well be a contract. In another example, A agrees to supply goods to B over a period of 3 years at a predetermined price. This is a contract, which can have multiple transactions (multiple supplies of goods to B).

Hence, reading the provisions of LODR, one can have the following conclusions –

  • It needs to be seen if the contract, and the RPT pursuant to such contract, is a secluded transaction, that is to say, the contract results in a single transaction. There is obviously no difficulty in this case. However, where the contract imbibes a series of transactions, the question will be, what are the transactions taking place during FY 22-23 (or subsequent years) pursuant to the said contract.
  • The transaction may be prospective, or may have already taken place. In view of the prospective applicability by way of reg. 23(6), the provisions will be applicable to prospective transactions only. However, it may be tricky to identify the core transaction, and the consequential flow of resources or reciprocal performance due to such a transaction. For example, if goods have been sold during FY 2021-22, for which payment is made in FY 22-23, the transaction was one of sale of goods, and the payment is merely a reciprocal performance. Similarly, if a loan has been given in earlier years, and the same is partly repaid or interest is serviced during FY 22-23, it cannot be argued that the repayment of the loan or the servicing of interest are “transactions” happening in FY 22-23. In this context, it may be noted that, while the meaning of RPT is borrowed from IndAS 24 and may include items like dividend, interest, etc., however, approval requirement under LODR is to be assessed basis the principles above as it is a core part of transaction, unlike ‘disclosures’ which is a consequential part of the transaction.

Therefore, if there is a contract, transactions under which run beyond the effective date, such contracts need to be taken before shareholders with respect to transactions yet to be initiated. In that case, acts already performed under transactions previously concluded under the same contract should not be hampered. However, transactions which are pending execution shall only begin once shareholder approval is received.

Thus, in the context of effective date for the present amendment to take over, there can be various scenarios, and the treatment would accordingly depend as noted below –

  Scenarios Possible implication under present amendment (assuming the transactions/contracts attain materiality limits)
Case 1 The entity enters into single transactions, where one transaction is equivalent to a contract This is a simplistic case. No implication under present amendment if transaction is done and completed. However, the company would need shareholder approval to undertake fresh transactions.
Case 2 The entity has entered into a contract for multiple transactions, and has completed all such transactions

 

 This is a simple scenario too – past transactions in a past contract. The contract stands ‘executed’. No transaction remains to be fulfilled. Hence, no impact under present amendment.
Case 3 The entity has entered into a contract for multiple transactions, and has completed only some transactions, while some transactions are yet to be executed This is a case of executory contract. As a part of the transactions contemplated under the contract remains to be fulfilled, the contract might need to be placed before shareholders.

If the contract fails before shareholders, the ‘to-be executed’ transactions may need to be aborted (with possible commercial implications, as discussed above).

For example, say A has agreed to deliver 5 lots of products to B over a period of 1 year. While 3 lots have been delivered and paid; 2 lots are pending (neither delivery nor payment has taken place). In such a case, the shareholder approval would be required for the pending 2 lots.
Case 4 The entity has entered into a contract for multiple transactions, and all transactions thereunder are just partly fulfilled.

 

 The contract too, is continuing. But this is a case where each transaction may have been partly fulfilled. For example, A might have delivered goods, but is yet to receive payments from B in tranches, or vice-versa. In such a case the transaction has been initiated, and should not come under shareholders’ radar.
Case 5 The entity has entered into a contract for multiple transactions (say 10 sale transactions), out of which –

–        3 are complete as to delivery and payment

–        2 have been delivered on credit sale basis, payment is awaited

–        in 5 sale transactions, goods are yet to be delivered

 Going by the interpretation and logic applied –

–        3 transactions are fulfilled, shall not need any approval

–        2 transactions have been initiated already, and thus the transactions are not ‘prospective’

–        remaining 5 transactions are prospective in nature, and thus would need shareholder approval.

Understandably, the examples above are basic ones; in reality, contracts may be quite complicated and each contract has to be read with all its dimensions to understand the implications with respect to the present amendments.

Hence, reg. 23(8) cannot be read dehors reg. 23(6). On a harmonised reading, it can be deduced that, where there are no prospective transactions, there is no question of applying reg. 23(8) and consequently, reg. 23(4) is not attracted.  However, shareholder approval for ‘existing contracts/arrangements’ which are continuing shall be required for prospective ‘transactions’ under those contracts.

An interpretation that the amendment applies only to prospective contracts but not to existing contracts will provide leeway to errant entities/controlling shareholders to have their way well before the amendment takes effect. Also, to say that prospective transactions under past contracts and those under future contracts should be treated differently, will lead to anomalies and discrimination, and would thus be incorrect. Therefore, the scope of RPTs to be considered for shareholder’s approval should be for all prospective transactions (including under continuing contracts) after the effective date.

There is another dimension to the issue, that is, aggregation, as discussed below.

Aggregation of transactions for determining material RPTs

As is clear from the language of the proviso to reg. 23(1), a ‘transaction’ has to be adjudged as ‘material’ or ‘immaterial’ in relation to ‘a related party’. Now, the revised definition of RPT includes cross-RPTs, that is, transactions by the listed entity and the subsidiary with – (i) their own related parties, and also, (ii) each other’s related parties[1]. Hence, all transactions which either the listed entity or the subsidiary(ies) enter with ‘a related party’ (that is, a particular related party) shall be aggregated to see if the value of the transactions is breaching the threshold limit. The intent is to regulate ‘the consolidated entity as a whole’, where a ‘network of entities’ may be used as conduit to benefit related parties[2]. Hence, irrespective of whether the transaction is undertaken by the listed entity or the subsidiary, if the counterparty is the same related party, aggregation has to happen. Otherwise, the easiest way to avoid materiality threshold will be to route the RPTs through various subsidiaries to ensure that the threshold is not breached. Note that, the aggregation shall exclude transactions entered into by a listed subsidiary with a related party, where the listed entity is not a party – as in that case, such transaction will have to be separately assessed under reg. 23 for the listed subsidiary. As proviso to reg. 23(4) also says, such transactions by listed subsidiary shall not require approval of shareholders of listed entity.

Also note that the coverage does not include associate companies. However, an interesting question is – whether any transaction entered into by the holding company of a listed entity with a related party (of its own or of the listed entity) needs to be considered? Assuming that the holding is an unlisted entity, there is no provision for aggregation of transactions at the holding level. On the other hand, if both holding and subsidiary are listed entities, question of aggregation does not arise (as explained above).

Another crucial question pertains to the manner of computing amounts for determining materiality. The answer depends on the type of transaction. For example, in case of a subsisting loan, payments of interest or even repayment of loan being reciprocal to the entire transaction of loan, should not be counted for the purpose of material thresholds. However, in case of incremental loans or renewal of loan or extending fresh loans, the entire amount will be required to be considered.

Manner of shareholder approval

Regulations require clubbing of all transactions to be undertaken with a particular related party for determining material RPT. However, the transactions may be of varied kinds – sale, purchase, loan, etc. Should shareholder approval be obtained separately for each kind of transaction? The regulations do not require separate resolutions. However, there is a possibility, that shareholders may be in favour of one transaction but not for others. Hence, the risk is that in case the shareholders intend to turn down one transaction, they will have to vote against the resolution covering several transactions.

Time available for seeking prior approval for material RPTs

Since, the amended provisions mandate prior approval of material RPTs, it is important to ascertain the time within which the listed entity shall approach shareholders, especially for ongoing transactions.

The requirement to seek approval of shareholders for material RPTs was first inserted under Clause 49 (VII) of the equity listing agreement w.e.f. October 1, 2014.  When LODR superseded the listing agreement, reg. 23 (8) of the LODR provided a timeline for seeking shareholder’s approval and mandated (permitted) placing the same in the first general meeting subsequent to notification of LODR. Hence, companies were saved from the hassle of convening an extraordinary general meeting solely for the purpose of reg. 23(4).

As regards the present amendment, there are three possibilities:

  1. Obtain shareholder’s approval at the first general meeting held after the effective date;
  2. Obtain shareholder’s approval prior to the effective date; or
  3. Obtain shareholder’s approval before the threshold of Rs. 1000 crore or 10% of consolidated turnover is actually crossed.

In the first case, one may argue that provisions of reg. 23(8) were only relevant at the time of commencement of the regulations and will not be relevant in case of commencement of further amendments under the said regulation. However, the intent of the provision, in our view, remains in effect that a reasonable time should be made available post enforcement of a provision to be able to approach the shareholders.

In the second case, it may be argued that material RPTs are required to be determined on the basis of the annual consolidated turnover for the immediately preceding financial year. The immediately preceding financial year prior to the effective date is March 31, 2022 and the annual consolidated turnover as on March 31, 2022 will be available only when the financial statements are audited and approved by the Board. However, if 10% of the existing consolidated turnover as on March 31, 2021 was already above Rs. 1000 crores and it is reasonably expected that the situation will continue; in that case, it will be futile to wait for the audited numbers for consolidated turnover of March 31, 2022.

The third case seems most suitable as the provisions mandate prior approval for material RPTs, therefore, listed entities are free to undertake RPTs until the said threshold is breached. However, given the broad definition of RPT, it is not just sufficient to track the RPTs undertaken by the listed entity itself but also the transactions undertaken by the subsidiaries with that particular related party. This tracking may be difficult at a group level and therefore, it is prudent to avoid seeking approval at the last hour.

Information to be placed before shareholders/audit committee

As per SEBI Circular dated November 22, 2021, an array of information is required to be placed before shareholders, including a summary of information provided by the management of the listed entity to the audit committee. All the ongoing contracts which are taken to the shareholders pursuant to the amendments, shall be accompanied by all such information as mandated in the aforesaid SEBI Circular.

Also, if the transactions were not placed before the audit committee earlier, then the same will be first required to be placed before the audit committee, along with the information prescribed in SEBI Circular and approved only by the independent directors in the audit committee, in terms of requirement under the proviso to reg. 23 (2) effective from January 1, 2022.

For discussion on the information requirements, refer our earlier article on the same.

Closing Remarks

The amendments are to be take effect from April, 2022; as such it is possible that the regulator comes up with further clarifications or literature on the amendments. The discussions above have been made keeping in view the framework as it appears today. Needless to say, RPT framework has been constantly evolving. While the intent of law is to reach out to undesirable transactions, there is a simultaneous compliance burden on the companies, which also percolates at the group level.

[1] Regulation 2(1)(zc)(i) includes a transaction involving a transfer of resources, services or obligations between  a 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.

[2] See discussions in pgs. 19-20 of Working Group Report on Related Party Transactions

Enhanced disclosures for RPT approvals under LODR

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SEBI accepts WG proposal for detailed review

Ajay Kumar K V | Manager (corplaw@vinodkothari.com)

Introduction

Related Party Transactions (‘RPTs’) involve conflict of interest and may consist of a potential means to transfer funds under the smoke screen of an unrelated party, however, for the benefit of certain related persons. Taking this fact into cognizance, SEBI constituted a Working Group in November 2019 to review the policy structure and gaps pertaining to RPTs in the SEBI (Listing Obligations and Disclosure Requirements) Regulations (‘Listing Regulations’), 2015 vis-à-vis the Indian Accounting Standards and the Companies Act, 2013 (‘Act’).  The Working Group made recommendations on expanding the scope of RPs and RPTs, as well as enhancing disclosures before the audit committee (‘AC’), shareholders, and to the exchanges (‘SEs’).

Consequently, SEBI in its meeting held on 28th September 2021[1] considered and approved the amendments to Listing Regulations in line with the recommendations of WG. The decisions have been implemented vide two separate notifications.

SEBI, vide its notification dated November 9, 2021[2], amended Regulation 23 of the Listing Regulations thereby making significant changes in the definition of Related Parties (‘RPs’), RPTs including the approval mechanism for material RPTs, etc. A detailed analysis of the said amendment can be read here.

However, the provisions with respect to the information to be placed before AC and shareholders for seeking their approval, as well as half-yearly disclosures to stock exchanges were not made part of the aforesaid amendment. These amendments have been introduced vide SEBI circular SEBI/HO/CFD/CMD1/CIR/P/2021/662 dated 22nd November 2021[3] (‘SEBI Circular’).

The Circular broadly provides for the following –

  • Information to be placed before AC;
  • Information to be provided to shareholders for consideration of RPTs; and
  • Format of disclosure of RPTs on a half-yearly basis

The Circular takes effect from 1st April 2022 (while the disclosure is to be triggered in the first half-year of 2022-2023, i.e., for the half-year ended 30th September 2022.)

Various practical implications and considerations arising out of the prescriptions of the Circular are discussed in this write-up.

Applicability

The Circular applies to listed entities which have listed their ‘specified securities’. Pursuant to the SEBI Listing Regulations 5th Amendment, a High Value Debt Listed Entity (‘HVDLEs’) is required to submit the disclosure on RTPs under Reg. 29(3) along with its standalone financial results for each half year.

HVDLEs are those listed entities which have listed its non-convertible debt securities and have an outstanding value of listed non-convertible debt securities of Rs. 500 crore and above as on 31st March 2021.

Thus, from the half-year ended 30th September 2022, HVDLEs are required to submit the disclosure of RPTs in the format prescribed in the SEBI Circular. Our detailed analysis of the amendments w.r.t HVDLEs can be read here.

Information to be provided to Audit Committee

The Act requires ‘relevant information’ to be placed before AC in case of omnibus approvals [refer, rule 6A of Companies (Meetings of Board and its Powers) Rules, 2014 (‘MPB rules’)]; however, relevant information has not been prescribed as such. While one may refer to section 188 read with rule 15 of the MPB rules which prescribes specific information to be placed before the board and shareholders for approval of RPTs. It would be counter-intuitive to say that the information which goes to the board for RPT approval would not go to AC. By obvious interpretation, all such information which rule 15 lists out, ought to be placed before AC as well.

SEBI Circular now specifically provides for minimum information to be placed before AC for consideration/approval of RPTs, including the items as listed below. The quantum of information to be placed before AC under the revised framework is more exhaustive than what is provided in rule 15. Also, while it is the obligation of the listed entity to place these information before AC, as a corollary, it appears equally incumbent on AC to demand such information from the entity.

It may also be important to note (as we discuss below), the notice sent to shareholders for seeking RPT approval shall consist of a “summary of information provided to the audit committee” as well. Hence, all such things which are placed before AC, shall also come before the shareholders, albeit in a summarised form.

Information to be provided to shareholders

The SEBI Circular has specifically listed out the details required to be placed before the Audit Committee and the Shareholders which has far-reaching impact on listed entities. It states that a summary of the information provided by the management of the listed entity to the Audit Committee while the RPT was placed before it for approval, shall also be given to the Shareholders while seeking their approval. The probable outcome of the same can be:

  • Where the Audit Committee seeks very limited information for approval of RPTs
  • Where the Audit Committee over-step into an enquiry state where information that may not be relevant to the transaction be placed before it, giving birth to thoughts of concerns in the mind of Shareholders

Another important change is that while placing information to the Shareholders, a statement that the valuation or other external report, if any, relied upon by the listed entity in relation to the proposed transaction will be made available through the registered email address of the Shareholders instead of making the same available for physical inspection at the registered office of the company which has been the existing practice.

The definition of RP as amended vide SEBI LODR Sixth Amendment Regulations, excluded acceptance of fixed deposits by Banks/NBFCs at the terms uniformly applicable/offered to all shareholders/public from the same, however, such transactions still require disclosure in the format specified by SEBI. This seems to be counter-productive as the intent of the law is to ensure that no transaction intended to benefit the RPs get away from the scrutiny of the Audit Committee and the Shareholders. To the paradox, even such transactions that have been executed 100% at par with public shareholders/customers of the company are also required to be disclosed by every listed company.

Snapshot of details requires to be placed before the AC & Shareholders

Some of the items are briefly discussed below:

  1. Type, material terms and particulars of the proposed transaction – By type, one means the kind of transaction – whether it is a purchase or a sale or a loan, etc. “Material terms” is a common expression meaning all such terms which might affect decision-making. Similar expression appears in rule 15(1)(c) as well.
  2. Source of funds for loans/ICDs, etc. in connection with the proposed transaction (clause 4(f)(i)).
  3. Financial indebtedness incurred (clause 4(f)(ii)) – This would indicate the financial burden which the listed entity/subsidiary might be bearing to enter into RPTs. Most entities will have Bank/Financial Institution borrowings (or even other borrowings) as their liabilities; however, it would be important to establish a ‘direct nexus’ between such borrowings and the proposed transaction. As to what constitutes ‘direct nexus’, is a function of various factors depending upon facts of each case. This aspect is also related to disclosure related to ‘source of funds’.
  4. Justification for RPT to be in interest of the listed entity (clause 4(g)) – This requirement is in consonance with the earlier requirement put forth by SEBI relating to the affirmation to be given by CEO/CFO of the listed entity on a half-yearly basis in Annex IV[4] of the Corporate Governance Report to the SEs.
  5. Ratio of proposed transaction to turnover (clause 4(e) read with clause 4(i))-The percentage of the listed entity’s annual consolidated turnover, for the immediately preceding financial year, is represented by the value of the proposed transaction, which is mandatorily (in case a subsidiary is a party, standalone turnover shall be considered) to be placed for approval.  Further, the listed entity may, on a voluntary basis, provide the percentage of the counter-party’s annual consolidated turnover that is represented by the value of the proposed RPT.
  6. Any other relevant information – This is the residual clause. While it enables the entity to put such other information as may be relevant’ notably, it is also open to AC to seek any other information, which in AC’s view is relevant.

Information to be placed for approval of RPTs under the Act

Information to be placed before Board as per Section 188 read with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014

  • name of the related party and nature of relationship;
  • the nature, duration of the contract and particulars of the contract or arrangement;
  • the material terms of the contract or arrangement including the value, if any;
  • any advance paid or received for the contract or arrangement, if any;
  • the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
  • whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
  • any other information relevant or important for the Board to take a decision on the proposed transaction.

Information to be placed before shareholders as per Section 188 read sub-rule 3 of Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014

  • name of the related party;
  • name of the director or key managerial personnel who is related, if any;
  • nature of relationship;
  • nature, material terms, monetary value and particulars of the contract or arrangements;
  • any other information relevant or important for the members to take a decision on the proposed resolution

Though rule 15, as stated above, does not explicitly state the details to be placed before Audit Committee except in case of Omnibus approval of RPTs under rule 6A of MBP Rules , it can be construed that the details to be placed before the Board of directors of the Company for approval of RPTs should be placed before the Audit Committee while seeking prior approval for RPTs by the listed entity.

On a careful analysis of the above, it can be seen that the capital market regulator has made the regulatory framework of RPTs more water-tight as compared to the existing norms under the Act. The listed entities shall now place exhaustive details before the Audit Committee and the Shareholders as compared to the norms for unlisted companies in the country.

New format of disclosure of RPTs under Reg. 23(9) of Listing Regulations

The SEBI Working Group had in its report, provided a format for disclosure of RPTs on a half-yearly basis as specified under Reg. 23(9). So far, the listed entities have been preparing the disclosure as per the IND-AS 24 since the regulator had not specified a format for the disclosure of RPTs.

The SEBI has now prescribed a format for disclosure of RPTs as recommended by the Working Group. The notes to the disclosure format put forward significant questions on how listed companies will ensure compliance w.r.t RPTs.

The note 1 states, opening and closing balances, including commitments, to be disclosed for existing related party transactions even if there is no new related party transaction during the reporting period. This would mean that those transactions which are continuing in nature, even though there were no transactions during the reporting period shall be disclosed, including any commitments. The term ‘commitments’ would mean those arrangements where both the parties agree to perform their obligations under the contract.

In note 3, exemption has been granted to listed banks for disclosures with respect to related party transactions involving loans, inter-corporate deposits, advances or investments. However, the same has not been extended to listed NBFCs. This could lead to additional compliance burden for NBFCs even though they are engaged in the financial activities.

The note 9 states “Transactions such as acceptance of fixed deposits by banks/NBFCs, undertaken with related parties, at the terms uniformly applicable /offered to all shareholders/ public shall also be reported.”

SEBI had excluded acceptance of fixed deposits by Banks/NBFCs at terms uniformly applicable/offered to all shareholders/public from the definition of RPTs but had explicitly stated that such transactions shall be disclosed.

Having said that, one should interpret the said note in such a way that the requirement of disclosure is only for acceptance of deposits by Banks/NBFCs which have been excluded from the definition of RPTs and not any other transaction which have been availed by any related party at par with the general public.

Conclusion

The recent amendments to the Listing Regulations evidences the growing concern over the regulatory framework for RPTs. The definition of RPT has been widened to include a bunch of transactions that have never been in the radar when it comes to RPTs.

SEBI Circular also put forward new challenges for listed entities for ensuring absolute compliance of the revised regulatory framework for RPTs and few of the new requirements may bring concerns for NBFCs to ensure compliance. Furthermore, the disclosure requirements for RPTs under the Listing Regulations have been made more stringent and elaborative to enable enhanced public disclosure of RPTs.

 

[1] https://www.sebi.gov.in/media/press-releases/sep-2021/sebi-board-meeting_52976.html

[2] https://www.sebi.gov.in/legal/regulations/nov-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-sixth-amendment-regulations-2021_53851.html

[3] https://www.sebi.gov.in/legal/regulations/nov-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-sixth-amendment-regulations-2021_53851.html

[4] https://www.sebi.gov.in/legal/circulars/may-2021/format-of-compliance-report-on-corporate-governance-by-listed-entities_50338.html

 

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

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

Presentation on Amended SEBI Framework on Related Party Transactions

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Detailed analysis of the amendments in RPT framework pursuant to SEBI LODR (6th Amendment) Regulations, 2021: https://vinodkothari.com/2021/11/sebi-widens-the-sweep-of-related-party-provisions-drastically/

Article explaining the amendments in RPT framework with action points: http://vinodkothari.com/2021/11/sebi-notifies-stricter-norms-for-rpts/

Snapshot of SEBI LODR 6th Amendment Regulations 2021: https://vinodkothari.com/2021/11/snapshot-of-sebi-lodr-6th-amendment-regulations-2021/

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

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

 

SEBI widens the sweep of related party provisions drastically

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Presentation on Amended SEBI Framework on Related Party Transactions: https://vinodkothari.com/2021/11/presentation-on-amended-sebi-framework-on-related-party-transactions/

Article explaining the amendments in RPT framework with action points: http://vinodkothari.com/2021/11/sebi-notifies-stricter-norms-for-rpts/

Snapshot of SEBI LODR 6th Amendment Regulations 2021: https://vinodkothari.com/2021/11/snapshot-of-sebi-lodr-6th-amendment-regulations-2021/

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

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

Snapshot of SEBI (LODR) (6th Amendment) Regulations, 2021

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Presentation on Amended SEBI Framework on Related Party Transactions – https://vinodkothari.com/2021/11/presentation-on-amended-sebi-framework-on-related-party-transactions/

Detailed analysis of the amendments in RPT framework pursuant to SEBI LODR (6th Amendment) Regulations, 2021: https://vinodkothari.com/2021/11/sebi-widens-the-sweep-of-related-party-provisions-drastically/

Article explaining the amendments in RPT framework with action points: http://vinodkothari.com/2021/11/sebi-notifies-stricter-norms-for-rpts/

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/

SEBI notifies stricter norms for RPTs

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Presentation on Amended SEBI Framework on Related Party Transactions: https://vinodkothari.com/2021/11/presentation-on-amended-sebi-framework-on-related-party-transactions/

Detailed analysis of the amendments in RPT framework pursuant to SEBI LODR (6th Amendment) Regulations, 2021: https://vinodkothari.com/2021/11/sebi-widens-the-sweep-of-related-party-provisions-drastically/

Snapshot of SEBI LODR 6th Amendment Regulations 2021: https://vinodkothari.com/2021/11/snapshot-of-sebi-lodr-6th-amendment-regulations-2021/

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

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

Revised formats for limited review/ audit report for entities with listed NCS

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corplaw@vinodkothari.com

Our resources can be accessed through below links:

  1. FAQs on recent amendments under the Listing Regulations – https://vinodkothari.com/2021/08/faqs-recent-amendments-listing-regulations/
  2. Articles on fifth amendment regulations:

Links to SEBI circulars and amendments:

  1. Revised formats for limited review/audit report for issuers of non-convertible securities (dated October 14, 2021)  – https://www.sebi.gov.in/legal/circulars/oct-2021/revised-formats-for-limited-review-audit-report-for-issuers-of-non-convertible-securities_53279.html
  2. Revised formats for filing information for issuers of non-convertible securities (dated October 05, 2021) – https://www.sebi.gov.in/legal/circulars/oct-2021/revised-formats-for-filing-financial-information-for-issuers-of-non-convertible-securities_53136.html 
  3. Revised formats for financial results and implementation of Ind AS by listed entities which have listed their debt securities and/or non-cumulative redeemable preference shares (dated August 10, 2016)- https://www.sebi.gov.in/legal/circulars/aug-2016/revised-formats-for-financial-results-and-implementation-of-ind-as-by-listed-entities-which-have-listed-their-debt-securities-and-or-non-cumulative-redeemable-preference-shares_32958.html 
  4. Format for financial results for listed entitites which have listed their debt securities and/or non-cumulative redeemable preference shares (dated November 27, 2015) – https://www.sebi.gov.in/legal/circulars/nov-2015/format-for-financial-results-for-listed-entities-which-have-listed-their-debt-securities-and-or-non-cumulative-redeemable-preference-shares_31120.html
  5. SEBI(LODR)(Fifth Amendment)Regulations, 2021 (dated September 07, 2021) – https://www.sebi.gov.in/legal/regulations/sep-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-fifth-amendment-regulations-2021_52488.html  

Managing significant transactions & arrangements with subsidiaries

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– Decoding Regulation 24 of Listing Regulations

By Payal Agarwal and Himanshu Dubey | corplaw@vinodkothari.com

Updated as on 27th October, 2021

The seamless flow of information between a holding company and its subsidiaries is imperative for effective governance on the level of a group. Since listed companies in India often function with complex structures having a lot of subsidiaries, it is not feasible for the holding company to deliberate upon all the matters of its subsidiary. Therefore, if not all, at least the significant transaction of the subsidiaries shall be placed on the board of the holding company. Regulation 24 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) provide for the same. The same though sounds commendable but is also surrounded by various practical difficulties while its implementation. Sometimes the compliance with the aforesaid provision becomes merely perfunctory. If too much is reported to the holding company, the relevance is lost while if too less is reported then the materiality is lost.

Need of fostering corporate governance requirements with respect to subsidiaries

In the normal course of business, it is very common for companies to have subsidiaries. However, the significance of such subsidiaries on the overall performance of the holding company varies. In case of listed companies, since the interest of the public at large is at stake, it becomes imperative that such stakeholders shall not only be informed about the listed company but also its subsidiaries. Ofcourse, the level and depth of information shall vary depending upon the significance of the subsidiaries as well as the significance of transactions being undertaken by such subsidiaries. Considering the aforesaid, Regulation 24 of the Listing Regulations requires the listed holding company to ensure corporate governance in its unlisted subsidiaries in certain ways. One of such ways is provided under sub-regulation (4) of Regulation 24 (Regulation) which says that the management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary.

The above-mentioned requirement was earlier applicable only to material unlisted subsidiaries but pursuant to amendment applicable w.e.f. April 1, 2019, the requirement has now been made applicable to all the unlisted subsidiaries of the listed holding company. However, the requirement though seems unequivocal, it comes with certain anomalies and practical difficulties. The author tries to present an analysis of the Regulation so as to answer the anomalies coming in the way of its practical implementation.

Applicability to subsidiaries

It is very common for a large corporate group to have various subsidiaries which in turn have various subsidiaries under them i.e. step down subsidiaries, from the angle of the ultimate holding company. The possibility of the holding company being listed and the subsidiaries including step down subsidiaries being unlisted is very high. This kind of a structure is very common and can be seen in most of the major corporate groups in India. Since the Regulation talks about subsidiaries, a question might pop up whether it only includes the immediate subsidiaries or the step down subsidiaries as well.

Given the purpose of the Regulation of enhancing corporate governance in the subsidiaries and also the fact that the shareholders interested in the listed company shall be aware of the business being undertaken by the subsidiaries as well. The principle behind this is that on the consolidated level, the performance of the holding company gets affected by the performance of its subsidiaries including its step down subsidiaries. Therefore it is pertinent to have some degree of supervision over them in terms of corporate governance though they are unlisted. Considering this rationale, there seems to be no purpose of excluding the step down subsidiaries from the purview of this Regulation. Hence, the Regulation will  be applicable to both immediate and step down unlisted subsidiaries. Let us understand the applicability of the Regulation under different cases enunciated below:

 

Case 1: since both the immediate subsidiary and the step down subsidiary are unlisted, the Regulation will apply to both of them and significant arrangements or transactions entered into by them will be reported to the ultimate holding company.

Case 2: since the subsidiary itself is a listed company and the Regulation clearly states that it applies to unlisted subsidiary. Therefore, the Regulation will not apply to the subsidiary. Going further, the step down subsidiary is unlisted, but the holding company just one level above is listed. Therefore, the Regulation will apply to unlisted step down subsidiary in relation to its immediate holding company. The ultimate holding company at the top will not be required to note or review the significant transactions or arrangements of the step down subsidiary under the Regulation.

Case 3: since the subsidiary is unlisted, the Regulation will have to be complied in relation to it. However, going forward to the listed step down subsidiary, since it is itself listed with the stock exchange, the Regulation will not apply as it is applicable only to unlisted subsidiaries.

Issues to address

Regulation 24(4) of the Listing Regulations reads as below –

“The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary.”

The following may be require to be identified –

While a plain reading entails the aforesaid questions, a deep analysis of the provisions and on consideration of the practical implications, further issues/questions may arise which have been dealt with at relevant places in this write-up.

Meaning of Transactions or Arrangements

The first question that arises while complying with the requirements of Regulation 24(4) is the identification as to what constitutes transaction or arrangement. While the term ‘transaction’ is not defined, the meaning of the same may be construed from Regulation 2(1)(zc) of the Listing Regulations and Indian Accounting Standard (Ind-AS) 24, defining the term “related party transaction” (RPT) .

The term has been defined as –

A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.

Accordingly, the term transaction may be understood to be “a transfer of resources, services or obligations between two parties”. Similarly, arrangements shall mean a plan or programme for undertaking or understanding to undertake such transactions in future.

 

Items not considered as transaction/ arrangement

There are various line items in the financial statements which does not arise out of any transaction or arrangement but as a result of accounting entries. Such line items such as deferred tax expenditure, provisions for future liabilities, unrealised gains or losses, etc do not involve any contract, result into any transfer and does not involve two or more parties. Therefore, these fail to contain the basic features of transaction and should not require reporting.

On the other hand, there are certain off-balance sheet items such as guarantee, or derivative transactions. The component of “transfer” may not be present from the early stage but may arise in due course. Moreover, these arise out of contracts and constitute transactions. Therefore, the same should be reported at the values as recognised in the books of accounts.

Assessment of Significance

The second step that comes after identifying the transaction/arrangement is the assessment of significance. For the purpose of Regulation 24(4), a transaction or arrangement is significant if it individually exceeds or is likely to exceed ten percent of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the unlisted subsidiary for the immediately preceding accounting year.

The criteria of significance as provided above requires that the threshold needs to be checked against different parameters “as the case may be”. The parameter to be checked will depend upon the nature of the transaction. Therefore, depending upon the nature of the transaction, the significance shall be assessed against the threshold determined on the basis of figures under relevant head as explained below:

 

There may be instances where the transaction does not affect any one parameter in isolation but  two or more of the parameters i.e. revenue, expenses, assets or liabilities together. In such cases, an issue may arise as to which parameter has to be considered. In such cases, all the parameters applicable to such a transaction shall be considered. 10% threshold of all such applicable parameters shall be determined and the lowest of such threshold shall be applied for assessment of significance of such transaction.

For example, S Ltd, the subsidiary of A Ltd, has entered into a transaction with Z Ltd, involving sale of goods. Such transaction involves revenue and therefore, significance of such transaction has to be assessed as a percentage keeping the total revenue of the preceding accounting period as the base for deriving such percentage. Say for example, the revenue of S Ltd is Rs. 100 crore in the preceding financial year. Therefore 10% of it will be Rs. 10 crores. Hence, if the value of the transaction being entered by  S Ltd with Z Ltd exceeds Rs. 10 crores, the same will qualify as a significant transaction for the purpose of the Regulation.

However, consider another example in which S Ltd has entered into an arrangement which impacts both the assets and expenses of the Company (creation of a new capital asset involving a huge outflow of cash). In such a case, both the assets and expenses being involved, the significance of the transaction has to be assessed for each of the bases individually and the one that hits the requirement at the lower end shall be taken for assessment of significance. Say for example, the assets and the expenses of S Ltd in the preceding financial year was Rs. 500 crores and Rs. 150 crores each. In such a case, thresholds shall be calculated based on both the figures and the lower of the two shall be the one that will determine the significance of the transaction. In the instant case, the thresholds are Rs. 50 crores and Rs. 15 crores, therefore the lower of the two i.e. Rs. 15 crores will be the one that will be considered. Hence, if the amount of transactions being undertaken exceeds Rs. 15 crores, it will qualify as a significant transaction.

 

Basis for assessment – standalone or consolidated?

Having settled with the parameter to be considered for various transactions, another question that may tweak our mind is whether the total revenues or expenses or assets or liabilities, as the case may be , has to be considered on a standalone basis or on a consolidated basis for the subsidiary. Here, one has to consider the fact that the compliance of the provision has to be ascertained by the listed holding company. Any company, which is a subsidiary of the subsidiary company, ultimately becomes the step-down subsidiary of the listed holding company thereby attracting Reg 24(4) of the Listing Regulations for reasons as discussed above and reporting its significant transactions or arrangements to the board of the listed company. In view of the same, an inference may be drawn that the aggregate figures for the preceding financial year shall be taken on a standalone basis, and not on a consolidated basis. This will also help in getting a clear picture and involving only those transactions that are actually significant for the subsidiary.

Determination of significance: Transactions/Arrangements based on contract

It is a very general phenomenon in companies to enter into contracts with different parties. Such contracts often extend to years and give rise to transactions. A common ambiguity that may arise in such cases is on determining the amount of such transaction for the purpose of the Regulation. Let us understand this scenario with some examples.

A Ltd., a subsidiary of B Ltd., enters into a rent agreement with X Ltd. The rent agreement extends to 5 years at a total value of Rs. 30 lakhs i.e. at a monthly rent of Rs. 50,000 per month. Now what shall be considered as the value of transaction for the purpose of the Regulation, Rs. 30 lakhs or Rs. 50 thousand? In our view, the total amount attributable to that particular financial year shall be considered for the purpose of the Regulation. In the instant case, assuming that the contract is effective from October 1, 2021, the amount shall be Rs 3 lakhs (rent during the FY 2020-21). Therefore, for assessing the significance of the transaction, the amount of Rs. 3 lakhs shall be compared against the threshold.

In the same case above, even if there has been no specific tenure of the contract but it rather would have only discussed monthly payment of Rs. 50 thousand as rent, still the amount payable in total throughout that financial year shall be taken and not the monthly rent.

The underlying principle is that the total amount of that transaction attributable to that financial year shall be considered as the amount of transaction for assessing significance under the Regulation.

Reporting: decoding the meaning of management and periodicity

Meaning of management

Regulation 24(4) says that “the management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity xxxxxxxxx”. This again comes up with two questions: who constitutes management and what shall be the periodicity for bringing significant transactions or arrangements to the notice of the board of the listed holding company.

Going by the general meaning as well as the intent and purpose of this requirement, the board of directors of the subsidiary as well as the KMPs/other senior executives just a level below the Board should be taken to constitute ‘management’.

Periodicity of reporting

Coming to the question of periodicity, the same has not been specified in the Listing Regulations itself, but left to the discretion of the board. However, the intent of the Regulation is to enhance corporate governance in the subsidiaries. Hence the periodicity should be reasonable enough to capture such a purpose.

Here, one may note that Regulation 17(2) of the Listing Regulations requires the board of the listed company to meet at least four times a year. Further, under Regulation 33, financial results are placed before the board quarterly which also includes results of its subsidiaries (since the results have to be submitted on both standalone and consolidated basis). Therefore, in consonance with the same, the list of significant transactions or arrangements of the subsidiaries should also be placed before the board of the listed company, if not more frequently, at least on a quarterly basis.

De-minimis exemptions – can a leeway be created?

Regulation 24(4) of the Listing Regulations, though very significant in terms of enforcing corporate governance requirements and ensuring transparency in respect of the unlisted subsidiaries of the listed company, may sometimes prove extraneous in the spirit of law. There may be cases where the subsidiary as a whole may be too small to have any significance on the accounts of the holding company.

A classic example of the same may be in case of a company, as a listed holding company, having a paid-up capital of Rs. 50 crores or above, having a subsidiary with total asset size of Rs. 1 crore. In this case, the total assets of the subsidiary amounts to mere 2% of the total asset size of the listed company. Here, a transaction involving purchase/ sale of an asset of Rs. 10 lacs will fall within the meaning of a significant transaction for the subsidiary company, however, will have a minimal impact on the listed holding company.

In such cases, going by the letter of the law, such transactions, even though having no significant impact on the listed entity as such, will have to be placed before the board thereby creating an unnecessary compliance burden producing no meaningful results.

A possible leeway that may be created as a make-through to provide certain de minimis exemptions on the basis of certain amounts or percentages. For example, a listed company may approve through its board and audit committee, that any transaction undertaken by a subsidiary, which amounts to not greater than 2% of the turnover or the paid-up capital or the networth of the listed company, will not be required to be reported to the board of the listed company.

However, while putting such de minimis exemptions, utmost care has to be taken to ensure that the self-approved exemptions do not turn out to completely erode the intentions of the law. Further, the requisite approvals have to be obtained and properly documented so as to avoid falling into a legal moss at a later stage.

Conclusion

The requirement under Regulation 24(4) enhances corporate governance standards in subsidiaries which were otherwise unlisted and exempted from such scrutiny. It allows the listed holding company to exercise due diligence in significant transactions entered by subsidiaries. However, in certain cases, the requirement becomes redundant due to absence of any material effect of subsidiary’s transactions on the overall performance of the holding company due to minimal asset size or revenue. Therefore, the idea of exempting subsidiaries below a certain threshold in terms of asset size or revenue of the listed company can be thought upon.The market regulator may also take a step to bring this as an amendment to the law, so as to ensure reduction of extra-compliance burden as recently suggested by FM Nirmala Sitharaman in her speech on the 53rd Foundation day of ICSI.

 

Read our other article on the subject –

‘Material Subsidiary’ under LODR Regulations: Understanding the metrics of materiality:

https://vinodkothari.com/2021/05/understanding-metrics-of-materiality/