SEBI approves stricter norms for RPTs

CS Vinita Nair | Vinod Kothari & Company

September 29, 2021

SEBI in its Board meeting held on September 28, 2021 approved the amendments in RPT framework that were proposed by the Working Group[1] (‘WG’) in January, 2020. The notification amending SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) is awaited. Certain amendments to come into force from April 1, 2023 and remaining from April 1, 2022. This write up discusses the key amendments approved by SEBI in the Board meeting held on September 28, 2021[2].

In view of the recent amendment made in Listing Regulations w.e.f. September 7, 2021 the framework for Related Party Transactions (‘RPTs’) is also applicable to a High Value Debt Listed Entity (‘HVDLE’)[3].

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, 20% or more of the equity shareholding in the listed entity will be regarded as a related party w.e.f. April 1, 2022;
  • Any person or entity holding, directly or indirectly, 10% or more of the equity shareholding in the listed entity will be regarded as a related party w.e.f. April 1, 2023

The intent is to ensure that none of the related party is able to escape classification on account of manipulation or active engineering. Identification as a related party should not be a concern for companies.

2.  Definition of RPTs covers combination of transactions:

 

Various combinations of transactions included within the ambit of RPTs. The intent behind expanding the definition of RPT is to govern 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.

The WG had recommended exclusion of preferential issue, in compliance with ICDR Reg, 2018; rights issue, bonus issue, dividend and buy-back of securities involving related parties from the scope of RPTs. Further, the definition was proposed to be excluded in case of mutual funds with listed units. One will have to await the amendment notification to ascertain if the same has also been approved.

3.  Prior approval of shareholders for Material RPTs

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.

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

5.  Enhanced disclosure before AC for prior approval for RPTs

As per the WG report, following enhanced disclosures were proposed:

  • 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 total revenue 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 total revenues, total assets and net worth, 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.

One will have to ascertain the actual disclosures approved by SEBI once the amendment notification is issued.

6.  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

  • 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.

7.  Reasoned disclosure in the explanatory statement

As per WG Report following additional information were required to be furnished in the explanatory statement annexed to notice being sent seeking approval for any proposed material RPT.

 

Read our other articles on the subject –

Detailed analysis on SEBI (LODR) (6th Amendment) Regulation dealing with framework for RPT: https://vinodkothari.com/2021/11/sebi-notifies-stricter-norms-for-rpts/

Write up on WG Report: https://vinodkothari.com/2020/01/sebi-proposes-stricter-norms-for-rpts/ 

Presentation on Related Party Transactions: http://vinodkothari.com/2017/03/presentation-on-related-party-transactions/

MCA revisits the existing cap of materiality of related party transactions u/s 188: http://vinodkothari.com/2019/11/mca-revisits-the-existing-cap-of-materiality-of- related-party-transactions-u-s-188/

Implication of definitional change in related parties- As per the Companies (Amendment) Act, 2017: http://vinodkothari.com/2018/04/implication-of-definitional-change-in-related-parties/

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

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