SEBI revisits RPT regime for subsidiaries

Changes proposed in manner of RP identification, threshold for significant RPTs 

– Avinash Shetty, Manager and Sourish Kundu, Executive | corplaw@vinodkothari.com

Background of CP

Related Party Transactions (“RPTs”) have been one such evergreen and ever-evolving aspect of corporate governance that has been put to guardrails on a frequent basis. SEBI, in its Consultation Paper dated 7^th February, 2025 has again rolled out a new set of proposals, this time primarily centered around RPTs undertaken by subsidiaries of a listed entity, but nevertheless leaving listed entities pondering on what their actionables might be. In this article, we have analysed the  proposals in brief.  

Discussion on Proposals

LODR Definition of RP to be extended to subsidiaries

Proposal: Following SEBI’s Informal Guidance on the manner of identification of Related Parties (“RPs”), which opined that the subsidiaries of LEs should maintain a list of their RPs in accordance with the Listing Regulations, instead of maintaining the same as per their respective applicable/local laws, SEBI now proposed to effectuate the same by way of appending an explanation to Reg. 2(1)(zc) that RP of subsidiary to be identified as per Reg. 2(1)(zb) of the Listing Regulations. 

Although the proposed insertion does not differentiate between a listed and an unlisted subsidiary, it is clearly understood that a listed subsidiary shall, by default, be following the holistically covered definition of RP given under Reg. 2(1)(zb). On the other hand, an unlisted subsidiary which may so far been following the definition of RP as given under the Companies Act, 2013 (“the Act”) might be expected to buckle up to bring in a lot more persons under the purview of the RPT regime as per the LODR definition – for the purpose of facilitating the parent’s RPT compliances. 

Possible concerns: While the SEBI’s approach of applying an entity-agnostic definition may seem to bring consistency and ease of collation of information across the group, but may raise several issues:

1. For the identification of RPs of unlisted entities in India, one will have to look at the residual definition given in Reg. 2(2) of the Listing Regulation, which in turn, refers to the CA 2013. Therefore, applying the definition of RP to unlisted entities would mean expanding the direct applicability of Listing Regulations.
2. Further, while assessing a related party under “applicable accounting standards”, the question would be whether the subsidiary would follow the accounting standards applicable to the listed entity or that applicable to the subsidiary itself. If it is contended that the unlisted subsidiary will refer to accounting standards as applicable to the listed entity, it would again be considered as a superimposition of inapplicable laws. Besides, there would be multiple interpretational issues given that AS/IndAS are vastly different.
3. Imposing Companies Act or Indian law definitions on overseas entities may raise concerns about extra-territorial jurisdiction.
4. Further, this might increase the compliance burden on the unlisted entities, requiring them to assess RPs under multiple laws.

The issues in putting the said proposal in action have been discussed in  detail in our write up on SEBI’s IG on RP identification by unlisted subsidiaries. 

Actionables: If the proposals take the shape of law, the following actionables might arise: 

1. Revamping the list of RPs: Given that a broader segment of persons are covered in terms of 2(1)(zb), whether pursuant to the applicable accounting standards, i.e. IndAS 24 in most cases or inclusion of promoter/promoter group persons, the list of RPs of subsidiaries needs to be updated and kept updated on a regular basis. 
2. Enforcing the enhanced RPT controls: Given that cross RPTs across a group also are subject to approval and/or ratification requirements under Regulation 23 of the Listing Regulations, the role of Audit Committee (“AC”) will widen to approve a greater number of RPTs, that is to say, now that an increased number of persons would be  covered in the list of RPs of subsidiaries, the scope of review would enlarge. 

Revised Thresholds for Subsidiary’s Significant RPTs

Proposal: Moving on to thresholds for significant RPTs – an RPT of the subsidiary to which the holding LE is not a party requires prior approval of the AC of the holding LE before it can be entered into, if the value of such RPT exceeds 10% of annual standalone turnover, as per the latest audited financial statements of the subsidiary, taken together with all transactions during a FY. [Pursuant to Regulation 23(2)(c) of the Listing Regulations] (hereafter referred to as “significant RPTs”)

However, as discussed in the CP, there may be cases where a transaction by a subsidiary of a LE exceeds the material RPT threshold, requiring shareholder approval, but does not exceed 10% of the subsidiary’s standalone turnover, thus bypassing the AC approval. For example, if a subsidiary has a standalone turnover of ₹12,000 crore, a transaction of ₹1,100 crore would cross the material RPT threshold of ₹1,000 crore . This would require shareholder approval. However, since ₹1,100 crore is below 10% of the subsidiary’s standalone turnover (₹1,200 crore), AC’s approval would not be needed.

The proposal seeks to include the absolute threshold of Rs. 1,000 crores as well in determining significant RPTs. Significance would be determined on the basis of value of transaction being Rs. 1,000 crores or 10% of annual standalone turnover of the subsidiary, whichever is lower. In our view, however, this proposal is more clarificatory in nature as it is difficult to envisage that any RPT proposal going to shareholders of an LE can go directly without coming before the AC of the LE. We have covered this scenario in our FAQs on RPT as well.

A specific carve out from the above requirement has been set down in respect of listed subsidiaries on which corporate governance norms and RPT framework norms are applicable. 

Further, in order to impose RPT controls on SME listed entities, SEBI in its Board Meeting held on 18^th December, 2024 approved, among other items, the materiality threshold of Rs. 50 crores or 10% of annual consolidated turnover, whichever is lower. Accordingly, for the purpose of determining significant RPTs of an unlisted subsidiary of SME LE, the threshold is Rs. 50 crores or 10% of annual consolidated turnover, whichever is lower. Note that the provision is applicable to a subsidiary of an SME LE – this is clear from para 5.3.1 of the CP.

The proposal as to thresholds is as tabulated below: 

Limits for Significant RPTs (whichever is lower)	Having financial track record*	Not having financial track record*
Subsidiaries of Main Board LEs	Rs. 1,000 crores or 10% of annual standalone turnover	Rs. 1,000 crores or 10% of standalone net worth
Subsidiaries of SME LEs	Rs. 50 crores or 10% of annual standalone turnover	Rs. 50 crores or 10% of standalone net worth

*Note:

1. Here, the financial track record shall mean the entity has published financial statements for at least one year.
2. In case the net worth is negative: Aggregate of share capital and share premium is to be considered. Basically, the negative P/L should be ignored.
3. Computations as to Net worth or Share Capital plus Share Premium, as the case may be,  is to be certified  by a practicing chartered accountant less than 3 months prior to seeking of requisite approval. 

Actionables: Unlisted subsidiaries of listed entities will have to reassess their transactions falling under significant RPTs to be taken to the listed parent’s AC.

Insertion of the word “listed” in Regulation 23(5)(b)

Although the change is merely clarificatory in nature, it is pertinent to note that there has been some ambiguity for RPT approvals, when RPTs are  being entered into between a holding company and its wholly owned subsidiary (WoS). Given that applicability of the Listing Regulations encompasses only listed entities, it was implied that the holding company referred is a listed holding company whose accounts are consolidated and presented to shareholders at the general meeting, and not an unlisted one. 

This interpretive addition of the word “listed” aims to remove any ambiguity in respect of the exemptions granted for certain RPTs involving WoS. 

Conclusion: 

The impact of the changes, if and when notified, may be expected to be as far fetched and require a revised understanding of the RPT regime to some extent, even if not entirely, similar to the rippling effect of the SEBI (LODR) (3^rd Amendment) Regulations, 2024 dated 12^th December, 2024. Further, there are certain aspects such as revision in definition of RPs for subsidiaries, which would require an introspection not just on the part of the subsidiaries of LEs, but at the group level as well. Needless to say, RPT – regime and controls, has always been a trending topic and changes w.r.t the same, although the first of this year, can definitely not be expected to be the last.

The RPT framework under the Listing Regulations has already been amended 7 times, and every time, it becomes tougher, all in the name of “Ease of Doing Business”. A document collating the evolution of RPT framework over the years is here: https://lnkd.in/gZ3Ca5yQ

Read more on Related Party Transactions here.