Industry Standards Note on Minimum information to be provided to the Audit Committee and Shareholders for approval of Related Party Transactions (as revised) dated June 26, 2025 (“RPT ISN”).
Applicability of RPT ISN
with effect from 1st September, 2025 (‘Effective Date’)
Approval of AC
Approval of shareholders (in case of material RPTs)
Date of execution of RPTs
Applicability of RPT ISN
Before Effective Date
Before Effective Date
After Effective Date
Not Applicable
Before Effective Date
After Effective Date
After Effective Date
Not Applicable
After Effective Date
After Effective Date
After Effective Date
Applicable
Any subsequent material modification, renewal, ratification etc. after the Effective Date should require detailed disclosures as per RPT ISN
Exemption from applicability of RPT ISN
Exempted RPTs: RPTs exempt from approval requirements under Reg 23(5) of LODR
Small value RPTs: Transactions with a related party for an aggregate value of upto Rs. 1 crore in a FY
RPTs placed for quarterly review under Reg. 23(3)(d).
Minimum information to AC divided into 3 parts
Part A – Minimum information of the proposed RPT, applicable to all RPTs (Para A1 to A5)
Part B – Additional information applicable to proposed RPTs of specified nature (Para B1 to B7)
Part C – Additional information applicable to Material RPTs (as per Reg 23 of LODR) of specified nature (Para C1 to C6)
Certification requirement to AC (‘KMP certificate’)
From
CEO/ Managing Director/ Whole-time Director/ Manager and
CFO of the listed entity
To the effect that
RPTs proposed to be entered are in the interest of the listed entity
Role of AC
To review the certificate – the fact to be disclosed in the notice to shareholders
Minimum information to shareholders
Information as may be required under CA, 2013
Information as placed before AC in terms of RPT ISN
AC may approve redaction of commercial secrets and such other information that would affect competitive position of listed entity
Subject to affirmation that, in its assessment, the redacted disclosures still provide all the necessary information to the public shareholders for informed decision making
Justification as to the transaction in the interest of the listed entity
Basis for determination of price and other material terms and conditions of RPTs
Affirmation that AC has reviewed the KMP certificate on proposed RPTs
Disclosure of approval of AC and recommendation of board
Web-link and QR code of third-party reports/ valuation report, if any, considered by AC
Role of Management
Management to provide information against each line-item
Indicate NA, where field is not applicable along with reason for non-applicability
Comments/ decision of AC
AC may provide comments on any line-item, based on its discretion
Rationale to be disclosed, in case an RPT is not approved
Comments and rationale to be minutised
Furnishing of valuation/ third party report
To be furnished to AC, if any
Web-link and QR code to be disclosed in shareholders’ notice, if considered by AC
Our analysis of the detailed disclosure requirements on relevant line-items are being collated in the form of FAQs. Keep checking our website for more.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Corplawhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Corplaw2025-06-27 14:19:322025-06-27 14:51:17Tailored to Fit Practically: Disclosure for RPTs under Revised Industry Standards
Starting a company often means wearing multiple hats. In these early stages, many founders structure their compensation through Employee Stock Option Plans (“ESOPs”) rather than traditional salaries. This arrangement makes perfect sense when resources are tight and every rupee earned needs to be reinvested into growth of the company. ESOPs align founders’ interests with the company’s long term success.
But here’s when things get complicated: the companies grow and prepare to go ‘public’; the founders find themselves classified as “promoters” under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). With more risks than rewards, they find themselves in a position, where their earlier ESOP grants, reflecting the growth of the company built by them, though perfectly valid during the grant, may now be taken away.
Recognising this unfair situation, at its meeting held on June 18, 2025, SEBI has approved an amendment providing regulatory relief for founders of companies who hold ESOPs and are subsequently classified as promoters at the time of an IPO. The amendment seeks to clarify the position of ESOPs and other share based benefits, granted to promoters and promoter group members prior to categorisation as such, and permit the exercise of such grants even after listing of the company.
While the amendments seek to enable founders in IPO-bound companies to avail of the share based benefits granted to them, the language of the explanation falls short of the intent. In this article, we discuss the need for the amendments in line with the existing scenario, how the amendments seek to meet the need and the gap that remains.
Proposal laid down in Consultation Paper
The proposal approved by SEBI in its recent BM is based on the proposal contained in its consultation paper dated March 20, 2025 to include an explanation under Regulation 9(6) of SBEB Regulations.
As per the Para 3.5.1 of the Consultation paper, SEBI had proposed to include an explanation may be inserted under regulation 9(6) of SBEB Regulations which would state:
Explanation 2: an employee, identified as a “promoter” or “promoter group” in the draft offer document filed by a company in relation to an initial public offering, who was granted options, SARs or other benefits under any scheme prior to being identified as a “promoter” or “promoter group”, as the case may be, shall be eligible to continue to hold, exercise or avail any such option, SAR or benefit, in accordance with its terms and granted, prior to one year from the date when the Company (i.e. its’ Board) decides to undertake Initial Public Offering and, in compliance with these Regulations.
The proposed explanation provides a clarification with respect to holding or exercise of share options or other similar benefits granted to an employee, identified as promoter/ promoter group in the DRHP, subject to the following conditions:
The grant of options or benefits must have been made prior to the employee being identified as a ‘promoter’ or ‘promoter group’; and
The grant must have occurred at least one year prior to the Board’s decision to undertake an IPO.
These conditions have been discussed in detail in the later part of this article. Before that, it is necessary to understand the need for the amendment.
Need for the amendment: prohibition on promoters holding ESOPs
An explanation to Rule 12(1) of the Companies (Share Capital and Debentures) Rules, 2014 excludes a promoter or a person belonging to the promoter group from the definition of ‘employee’, in the context of eligibility for grant of ESOPs.
However, pursuant to Companies (Share Capital and Debentures) Third Amendment Rules, 2016 Dated July 19, 2016, a proviso has been added to the aforesaid explanation that provides an exemption for start-up companies up to ten years from the date of its incorporation or registration. Therefore, in case of a start-up, a promoter or member of promoter group may also be issued ESOPs upto 10 years from the date of its incorporation.
Similar prohibition applies to a listed entity, as per Reg 2(1)(i) of SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, pursuant to which, an employee does not include a promoter or a person belonging to promoter group. There is no exemption for a start-up company under the said Regulations.
Founder or promoter : a question of identity
The term ‘promoter’ is defined in an almost similar fashion in both Companies Act, 2013 (“ and ICDR Regulations. As per the definition, there are three limbs to the definition of promoter, being:
Promoter by proclamation: that is, the person who is named as promoter in the offer documents or the annual return.
Promoter by control: that is, a person having control over affairs, whether as shareholder, director or otherwise, directly or indirectly.
Promoter by absentee control: that is, by orchestrating the affairs of the company by giving instructions to the board of directors, which the latter is accustomed to adhere to.
Further, the term ‘promoter group’, is not a defined term under the Companies Act, 2013 and hence, may be open to interpretation.
On the question of whether or not every founder may be considered as promoters, what needs to be understood is that while the founder may be the one who initiates the idea of the start-up, it may so happen that subsequent to new investors coming in, the founder may gradually lose his powers to control the affairs of the company. The board becomes independent, the private equity investors get to have a call in various matters, and the powers get diluted, pursuant to which the founder may not be recognised as a promoter after all.
However, the stock exchanges apply various additional criteria for considering a person as ‘promoter’, some of which may categorise a Founder as promoter, regardless of whether the same is holding ‘control’ in the company or not.
For instance, as per news reports[1], the guidance issued by NSE for promoter categorisation in case of an IPO-bound company, requires founders to be categorised as promoters if:
They hold a position or have the right to be nominated, as a director or KMP/SMP; and
They have a collective shareholding of 10% or more of the equity shares (including options which are vested till the date of listing) of the company, either directly or through any legal entities or persons controlled by such founder or his/her immediate relatives.
Therefore, even when a founder may not be holding ‘control’ in a company, he may be categorised as a promoter by holding options if they are crossing the 10% threshold.
Fate of ESOPs issued to founders, later turned promoters
The SBEB Regulations, as discussed above, do not allow promoters to hold ESOPs or other share based benefits in a listed entity. Although applicable to listed entities, the compliance is required to be ensured at the stage of filing of DRHP, and hence, IPO-bound companies are also covered.
While the Regulations exclude the promoters from the definition of an employee eligible for the receipt of ESOPs, it does not clarify the treatment of options that are already granted to promoters, prior to such classification. This led to a confusion in case of options issued to Founders-turned-Promoters, putting the fate of such granted options in a grey area.
In case a view is taken that such options need to be liquidated, and the benefits thus accruing, has to be foregone, at the time of identification as a promoter, the same would not be justified. It is not on their own wish to become a promoter, and since the options are part of the remuneration of the Founders as employees, granting them an immunity for such options is needed.
Decoding the conditions for exemption
1. Grant of options prior to identification as promoter or promoter group
The purpose of the amendments is to primarily cover the ‘founders’ of start-up companies, where it would be typical to give share based options to incentivise the founders and as a remuneration against the services offered by such employees.
As discussed above, there may be situations where a person, though a founder of the company, was not categorised as promoter under CA, 2013. However, pursuant to the categorisation conditions followed by the SEs, during filing of DRHP, may get covered as a ‘promoter’ or ‘promoter group member’.
The explanation refers to grant of share based benefits, prior to being identified as a “promoter” or “promoter group”, and thus, refers to such employees/ founders who were not categorised as promoter/ promoter group prior to grant of options.
However, consider the case of a founder of a start-up who was identified as a promoter since inception, but was granted ESOPs pursuant to the exemption available to start-ups under CA, 2013. If the company later decides to go for listing, it remains unclear whether such ESOPs would remain valid under this proposed explanation. This is because, technically, the first condition requiring that the ESOP grant be made before the individual was identified as a promoter, is not satisfied in such cases.
This condition risks contradicting the very objective of the amendment, which is to safeguard pre-IPO entitlements granted to founders while ensuring regulatory safeguards for promoters are maintained at the time of listing. The start-up related exemption, as available to the promoters under CA, 2013 is with the objective of permitting the founders, whether promoter or otherwise, to be benefitted from the growth of the company and be entitled to share based benefits.
2. Grant must have occurred at least one year prior to the Board’s decision to undertake an IPO
The condition requires the options or other benefits to have been granted at least 1 year prior to the board’s decision of undertaking an IPO. The clause provides a cooling off period between the grant of options and the company’s IPO decision, so as to prevent situations where companies might quickly issue ESOPs or other share based benefits to promoters just before going public, thus taking benefit in ingenuine cases.
The one year requirement is a reasonable safeguard, as it helps protect the interest of public shareholders and ensure that such grants are made in advance to genuine employees only as a reward for their contribution to the company and not as an opportunistic benefit tied to the IPO.
Conclusion
While SEBI’s proposal to introduce an explanation under Regulation 9(6) of the SBEB Regulations is a well-intended step towards addressing the gaps affecting founders of start-ups, its current framing leaves room for ambiguity.
The final wording of the amendment, once notified, will be pivotal in determining whether this balance between protecting founders’ rights and maintaining necessary safeguards for promoters. It is hoped that SEBI will clearly address this issue in the final version, so that the real purpose of the amendment is not lost in technical wording.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-06-25 18:40:062025-06-26 10:34:39ESOPs for founders: Well intended relief, garbled by language?
Here is a tale of three families, and trust, almost every business family in the country may fit in the tale. (All names are completely hypothetical.)
Family One – Jaani family, owning large number of listed companies in the country. Ashok, son of the founder, got married to Rani, daughter of the founder of Maani family.
Maani family – once again another leading industrial houses in the country. Rani, daughter of the founder, has two siblings – Prashik, and Vimla. Prashik runs the family’s businesses. Vimla got recently married to Varun, from Dhyaani family.
Camera shifts to Dhyaani family, where Vimla got married to Varun. Relations are made between equals – hence, Dhyaani family is no less in stature than the Maani family and the Jaani family.
All the families have variety of listed and unlisted companies in their control. In most cases, shareholdings of operating entities are through investing vehicles, which are held in the name of individuals of the families.
Given the definition of “promoter group”, Ashok is a promoter. Ashok’s wife, Rani is obviously an “immediate relative” and hence a part of promoter group.
By definition (if we read it to mean parents, brother, sister and child of the spouse too), Rani’s father, the founder of the Maani family, becomes a part of the “promoter group” for Jaani family. So also will be Prashik. Vimla, though married in Dhyaani family, being sister of Rani, will also be part of “promoter group”.
Now look at the consequences. All bodies corporate where 20% shareholding is held by the individuals of Maani family – founder, Prashik and Prashik’s mother, will form part of the promoter group of the Jaani family.
We don’t stop here – all entities where Vimla, now a part of Dhyaani family, will also need to identify bodies corporate where she holds 20%, and these entities will be reported as a part of the PG for Jaani family.
The same process will have to run for Maani family and Dhyaani family – hence, the focus may actually shift over to the country’s business tycoons one by one.
The sweep of the definition of “promoter group” may have had its own intent, but it cannot be stretched to include सगे सम्बन्धी where there is no evidence of commonality. Sadly enough, SEBI rules require a listed company to list out the names of all such सगे सम्बन्धी entities, no matter whether there is a shareholding overlap or not. And all these entities will be identified as “related parties” too.
Our other resources on promoter/promoter group can be accessed below:
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Vinod Kotharihttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngVinod Kothari2025-06-25 12:59:572025-07-17 13:29:08Yeh Rishta kya kahlaata hai! – the strange case of "promoters-in-law"
– Easing ESOPs for IPO-bound companies, relaxations to SEBI regd. intermediaries, providing clarity for uniformity of practices
– Team Corplaw | corplaw@vinodkothari.com
Various proposals have been approved by SEBI in its Board meeting dated June 18, 2025, pertaining to various relevant regulations. The approved changes may impact various market participants – listed entities as well as IPO-bound companies, SEBI registered intermediaries and regulated entities such as REITs, Invits, AIFs, FPIs, etc. We briefly discuss some of the important proposals as approved by SEBI.
Relief for promoters in IPO-bound companies: easing rules on ESOPs and offer for sale
Relaxation in eligibility norms with respect to Offer for Sale (OFS) in IPO (see Consultation Paper here)
Exemption from minimum holding period of 1 year extended to equity shares arising from conversion of Compulsory Convertible Securities (CCS), where such CCS were acquired pursuant to an approved scheme (earlier limited to equity shares) to assist in reverse flipping (i.e. shifting the country of incorporation from a foreign jurisdiction to India) [Reg 8 & 105 of ICDR Regulations].
Enabling Minimum Promoter Contribution (MPC) by Relevant Persons (apart from promoter) through equity shares arising from conversion of fully paid-up CCS
Relevant Persons comprise of AIFs, FVCIs, Scheduled Commercial Banks, PFIs, insurance cos etc.
Founders-turned-promoters can retain share based benefits, ESOPs granted 1 year prior to filing of DRHP (see Consultation Paper here)
Brings relaxation for treatment of options granted prior to becoming a promoter, which was otherwise required to be liquidated
Dematerialisation of shares: pre-IPO and post-listing requirements
Mandatory dematerialization of securities held by critical pre-IPO shareholders before filing of DRHP (see Consultation Paper here):
Following categories covered:
Promoter Group
KMPs
Directors
Employees
Selling Shareholders
QIBs
Senior Management
Financial sector entities
To reduce volume of physical shares
CA, 2013 also requires mandatory dematerialisation of holding of promoters, directors and KMP of companies prior to undertaking any share based corporate action [Rule 9A and 9B of Companies (Prospectus and Allotment of Securities) Rules]
Corporate actions by listed entities in dematerialised form only
For shares to be issued pursuant to consolidation/split of face value of securities and scheme of arrangements
CA, 2013 already requires companies to issue shares in dematerialised form only
Fund raising mandatory for social enterprises registered with SSE, relaxations in eligibility conditions for registration
Mandatory fund raising through SSE
Registration to lapse if social enterprise registered with SSE does not raise funds within 2 years from registration
Definition of “Not for Profit Organization” expanded [Reg 292A(e) of ICDR]
Trusts registered under Indian Registration Act, 1908 permitted (extant regulations refer to Indian Trusts Act, 1882 and a trust registered under the public trust statute of the relevant state)
Charitable society registered under relevant state Act (extant regulations covered only society registered under the Societies Registration Act, 1860)
Companies registered under Section 25 of the erstwhile Companies Act, 1956 (clarity provided since extant regulation refers to section 8 of 2013 Act)
List of eligible activities expanded to align with Schedule VII of the Act, 2013 (pertaining to CSR activities)
Criteria of 67% of total activities reflecting in eligible activities (through revenues, expenditure or total customer base) relaxed
To be applicable only to “for profit social enterprises”
Annual disclosures bifurcated into financial and non-financial disclosures
Different timelines to be prescribed for such disclosures
CP prescribes the extant 60 days’ period for non-financial disclosures, and upto 31st October after end of FY for financial disclosures
Self-reporting of Annual Impact Report instead of certification from Social Impact Assessor
For social enterprise that has not raised funds through the SSE
Change in nomenclature of “Social Impact Assessment Firm” to “Social Impact Assessment Organization”(SIAO) and eligibility conditions for the SIAO prescribed
SIAO to is permitted to conduct social impact assessment provided they have at least two social impact assessors in full time employment
Having an and such impact assessors have experience of at least 3 years of conducting social impact assessment.
Social impact assessor to sign the report if SIAO does not have 3 years’ track record
Revamping of regulatory framework for Angel Funds under AIF Regulations
Mandatory registration of Angel Investors as Accredited Investors(AI)
Attracts independent verification of investor status
Recent CP dated June 17, 2025 proposes certain flexibilities under the accreditation framework.
Grandfathering of earlier investments as non AI, and implementation through glide path
Accredited Investors included as Qualified Institutional Buyer in ICDR for investments in Angel Funds.
Relaxation in investment norms by angel funds in investee company
Floor and cap relaxed from Rs. 25 lacs to Rs. 10 lacs, and from Rs. 10 crores to Rs. 25 crores respectively
Concentration limits of 25% per investee company removed.
Follow on investments permitted in investee company, though may no longer be start-up
Scheme may now have more than 200 AIs
Minimum continuing interest of Sponsor/ Manager at investment level instead of Fund level
higher of 0.5% of investment amount or Rs. 50,000
Earlier the commitment was required to be maintained at a fund level only
SEBI regulated entities enabled to carry out activities not regulated by SEBI
Merchant Bankers and Debenture Trustees have been permitted to carry out activities not regulated by SEBI within the same legal entity subject to following conditions:
DT may undertake activity within the purview of any other financial sector regulator (FSR), subject to compliance with the regulatory framework specified by such regulator
For activities not within the purview of SEBI or other FSR, the same shall be fee-based and non-fund-based activity and pertain to FSR
Had been previously required to hive off such activities pursuant to SEBI Board Meeting decision in December, 2024
Custodians permitted to carry out other financial services under the regulatory oversight of other financial sector regulators within the same legal entity
subject to having adequate mechanisms to address issues of conflicts of interest
Non-bank associated custodians offering services which are not overseen by any financial sector regulator to :
Disclose clearly that such activities are outside the purview of, and without recourse to SEBI
Set up distinct strategic business units (SBUs) for undertaking activities not under the purview of SEBI with adequate mechanisms to address issues of conflicts of interest
Clarity of responsibilities and uniformity measures for DTs
Specifying rights of DT and corresponding obligations on issuer under LODR
To enable DT in enforcing its rights
Enabling provisions for providing format for model debenture trust deed (DTD) [Refer Annexure-1 of Consultation paper dated Nov 04, 2024 for the model DTD as proposed by SEBI]
Modification in manner of utilization of Recovery Expense Fund (REF) (see an article on REF here)
Elaboration of list of expenses for which REF can be utilised
To provide ease to DTs to take prompt action upon default by listed entity
Relaxations in regulatory norms for REITs and InvITs [see consultation paper dated May 02, 2025]
Definition of ‘public’ under REITs / InvITs to be amended to include related parties of the sponsor, investment manager/manager and project manager to qualify as public if such related parties are Qualified Institutional Buyers
Relevant for determination of minimum public holding
Related party of REIT/ InvIT viz. sponsor, sponsor group, investment manager, project manager are not regarded as ‘public’
Adjustment of negative net distributable cash flows generated by the Holdco against cash received from the SPVs
Net cash flow post adjustment to be distributed to unitholders
Alignment of timelines of submission of various reports including quarterly reports, valuation reports with the timelines for submission of financial results.
Reduction of minimum allotment lot for privately placed InVITs to INR 25 lacs from INR 1 crore to align with the trading lot in secondary market.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-06-21 12:05:272025-06-21 12:07:33SEBI approves a mix of reforms for regulated entities
The right of a shareholder to receive dividends is conferred under Section 123(5) of the Companies Act, 2013 (‘CA, 2013’). The corresponding obligations on the company are elaborated in Chapter VIII of the Act (Sections 123 to 127), read with the Companies (Declaration and Payment of Dividend) Rules, 2014. For listed companies, Regulations 42 and 43 of the Listing Regulations, 2015 further prescribe a few procedural requirements for declaration and payment of dividend.
However, neither the CA, 2013 nor the Listing Regulations, 2015 recognise a shareholder’s unilateral right to waive the dividend declared by the company.
Waiver by a shareholder – whether dependent on other shareholders
Although the statutory framework does not provide for a waiver, the relationship between the company and its shareholders can, to an extent, be governed by a contract, so long as such contract is not ultra vires the CA, 2013. It is a settled position that the Articles of Association (AoA) of a company form a contract between the company and its members and also inter-se among the members (see Naresh Chandra Sanyal v. Calcutta Stock Exchange Association1).
Subject to the provisions of the Companies Act the Company and the members are bound by the provisions contained in the Articles of Association. The Articles regulate the internal management of the Company and define the powers of its officers. They also establish a contract between the Company and the members and between the members inter se. The contract governs the ordinary rights and obligations incidental to membership in the Company
As per the Indian Contract Act, 1872 (‘Contract Act’), a proposal becomes a promise, only when it is accepted by the counterparty. A promise takes the form of an agreement which, if enforceable under law, becomes a contract. Therefore, there has to be assent from both the parties, in order to constitute a contract. Where one party only proposes, and the other does not accept, there is no question of a promise/agreement/contract.
Further, when a shareholder intends to waive his rights as to dividend – such a dividend foregone can be construed as a gratuitous transfer to the kitty of other shareholders – in essence, a gift. Under the settled principles of common law and as per section 122 of Transfer of Property Act, 1882, a gift is valid only when accepted by the recipient.
122. “Gift” defined.—“Gift” is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee
XX
Therefore, for a waiver to operate as a gift benefiting others, it must be accepted by the general body of shareholders who stand to receive this “gift”. Therefore, without the express consent by other shareholders, a request of waiver of dividend by one shareholder cannot be acceded to.
Binding nature of promises under Contract Law
Section 37 of the Contract Act mandates that parties to a contract must perform or offer to perform their respective promises, unless such performance is excused under the Act or any other applicable law. Where under articles of association, a company agrees to declare and pay the dividend, the shareholders agree to receive the same in accordance with the provisions of the articles. Therefore, once a dividend is declared, the company is under a legal obligation to pay it and the shareholder is obligated to receive it. The shareholder cannot unilaterally waive this right unless such dispensation is as per law.
Here, it might also be relevant to discuss the peripheries of section 63 of the Contract Act, which provides that a promisee may waive or remit performance wholly or in part. But the spirit of this provision is to release the promisor of an obligation, not to impose an additional burden. In Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd.2 it was held that a promisee may extend the time for the performance of the promise u/s 63 of the Contract Act. However, the promisor may choose not to accept the extended time if it will hamper the performance of his promise. Therefore, a promisor is not bound to accept any waiver of the promisee, he is allowed to weigh-in his/her own interests.
Therefore, section 63 does not operate without any boundaries.
Implications of unilateral waiver on the company
Dividend declaration is a strategic financial decision taken by the Board after considering multiple factors such as growth strategy, return on equity, share price impact, liquidity needs, and need for reserves. If a company provides this right to one shareholder, it may have to provide the same right to other shareholders. Therefore, a unilateral waiver by a shareholder could distort this delicate balance in several ways, as it may affect the equitable treatment of shareholders and also impact the company’s policy on retained earnings/general reserves.
Rebutting section 127 concerns
One may argue that Section 127 of the CA, 2013 which allows shareholders to give directions regarding the “manner of payment” of dividend, empowers them to waive their dividend. However, this is a misreading of the provision. Section 127 pertains to mode and timeline of payment, not the right to forgo the dividend altogether. Refusing to entertain a waiver does not constitute a violation of this section.
Closing thoughts
Thus, what appears to be an act of generosity might actually prejudice other shareholders and strain the company’s governance framework. Therefore, in our view, a shareholder seeking waiver of dividends may have a generous intent – however, that cannot happen without the approval of the general body of shareholders.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-05-30 14:28:492025-05-30 17:57:03Waiver of dividend by shareholder: Whether generosity can become atrocity?
Requirements to apply to all listed issuances, from financial and non-financial issuers
Below are the major highlights of the SDI amendment regulations:
SEBI on May 5, 2025 has issued the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) (Amendment) Regulations. 2025. It may be noted that the SDI Regulations, was first notified on 26th May, 2008, after public consultation on the proposed regulatory structure with respect to public offer and listing of SDIs, following the amendments made in the SCRA. The Regulations, originally referred to as the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008, were subsequently renamed as SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008, w.e.f. 26th June, 2018.
In order to ensure that the regulatory framework remains in accordance with the recent developments in the securitisation market, a working group chaired by Mr. Vinod Kothari was formed to suggest changes to the 2008 SDI regulations. Based on the suggestions of the working group and deliberations of SEBI with RBI, the amendment has been issued. The amendment primarily aims to align the SEBI norms for Securitised Debt Instruments (SDIs) with that of the RBI SSA Directions which only applies in case of securitisations undertaken by RBI regulated entities.
It can be said that these amendments are not in conflict with the SSA Directions and therefore for financial sector entities while there may be some additional compliance requirements if the securitisation notes are listed, there are as such no pain points which discourages such entities to go for listing. Further, certain requirements such as MRR, MHP, minimum ticket size have only been mandated for public issue of SDIs and therefore are not applicable in case of privately placed SDIs.
This article discusses the major amendments in the SDI Framework.
Major Changes
Definition of debt
The amendment makes the following changes to the definition of debt:
All financial assets now covered – In order to align the SDI Regulations with the RBI SSA Directions, the definition of ‘debt’ has been amended to cover all financial assets as permitted to be originated by an RBI regulated originator. Further, this is subject to the such classes of assets and receivables as are permissible under the RBI Directions. Note that the RBI SSA Directions does not provide a definition of ‘debt’ or ‘receivables’, however, provides a negative list of assets that cannot be securitised under Para 6(d) of the RBI SSA Directions.
Equipment leasing receivables, rental receivables now covered under the definition of debt.
Listed debt securities – The explicit mention of ‘listed’ debt securities may remove the ambiguity with regard to whether SDIs can be issued backed by underlying unlisted debt securities, and limits the same to only listed debt securities. The second proviso to the definition further clarifies that unlisted debt securities are not permitted as an underlying for the SDIs.
Trade receivables (arising from bills or invoices duly accepted by the obligors) – As regards securitisation of trade receivables, acceptance of bills or invoices is a pre-condition for eligibility of the same as a debt under the SDI Regulations.
‘Acceptance’, in literal terms, would mean acknowledgement of the existence of receivables. Under the Negotiable Instruments Act, 1881, ‘acceptance’ is not defined, however, ‘acceptor’ is defined to mean the drawee of a bill having signed his assent upon the bill, and delivered the same, or given notice of such signing to the holder or to some person on his behalf.
Note that a bill or invoice may either be a hard copy or in digital form. In the context of digital bill, acceptance through signature is not possible; therefore, existence of no disputes indicating a non-acceptance, should be considered as a valid acceptance.
Such Debt/ receivable including sustainable SDIs as may be notified by SEBI – In addition to the forms of debts covered under the SDI Regulations, powers have been reserved with SEBI to specify other forms or nature of debt/ receivable as may be covered under the aforesaid definition. Further, the clause explicitly refers to sustainable SDIs, for which a consultation had been initiated by SEBI in August 2024[1].
Conditions governing securitisation
SEBI has mandated the following conditions to be met for securitisation under the SDI Framework:
No single obligor to constitute more than 25% of the asset pool – This condition has been mandated with a view to ensure appropriate diversification of the asset pool so that risk is not concentrated with only a few obligors. However, it may be noted here that the RBI regulations does not currently prescribe any such obligor concentration condition. Only in case of Simple, Transparent and Comparable securitisation transactions, there is a mandate requiring a maximum concentration of 2% of the pool for each obligor.
However, SEBI has retained the power to relax this condition. In our view, this may be relaxed by SEBI for RBI regulated entities considering that RBI does not prescribe for any such condition.
All assets to be homogenous – This is yet another provision which is only required by RBI in case of STC transactions. However, even in the context of RBI regulations, what exactly constitutes a homogenous asset is mostly a subjective test. SEBI has defined homogenous to mean same or similar risk or return profile arising from the proposed underlying for a securitised debt instrument. This has made the test of homogeneity even more subjective. For the purpose of determining homogeneity, reference can be made to the homogeneity parameters laid out by RBI in case of Simple, Transparent and Comparable securitization transactions.
SDIs will need to be fully paid up- The SDIs will need to be fully paid up, i.e., partly paid up SDIs cannot be securitised.
Originators to have a track record of 3 financial years: Originators should be in the same business of originating the receivables being securitised for a period of at least three financial years. This restricts new entities from securitising their receivables. However, this condition in our view should only apply to business entities other than business entities, complying with this condition does not seem feasible.
Obligors to have a track record of 3 financial years– The intent behind this seems to to reduce the risk associated with the transaction as the obligors having a track record in the same operations which resulted in the creation of receivables being securitized. However, this condition cannot be met in most types of future flow securitisation transactions such as toll road receivables and receivables from music royalties.
SEBI has made it clear that the last two conditions of maintenance of track record of 3 years for originators and obligors will not apply in case of transactions where the originators is an RBI regulated entity.
Amendments only applicable in case of public issue of SDIs
The following amendments will only be applicable if the SDIs are issued to the public. Here, it may be noted that the maximum number of investors in case of private placement of SDIs is limited to 50.
Minimum Ticket Size
The Erstwhile SDI Regulations did not provide for any minimum ticket size. However, with a view to align the SDI regulations with that of RBI’s SSA Direction, a minimum ticket size of Rs. 1 crore has been mandated in case of originators which are RBI regulated as well as of non-RBI regulated entities. It may however be noted that the minimum ticket size requirement has only been introduced in case of public offer of SDIs. Further, in cases with SDIs having listed securities as underlying, the minimum ticket size shall be the face value of such listed security.
Securitisation is generally perceived as a sophisticated and complex structure and therefore the regulators are not comfortable in making the same available to the retail investors. Accordingly, a minimum ticket size of Rs. 1 Crore has been mandated for public issue of SDIs. In case of privately placed SDIs, the issuer will therefore have the discretion to decide on the minimum ticket size. However, since the RBI also mandates a minimum ticket size of Rs. 1 Crore, financial sector entities will need to adhere to the same.
Here, it is also important to note that in case of public issue of SDIs with respect to originators not regulated by RBI, SEBI has made it clear that the minimum ticket size of Rs. 1 Crore should be seen both at initial subscription as well as at the time of subsequent transfers of SDIs. However, nothing has been said for subsequent transfers in cases where the originator is a RBI regulated entity. The RBI SSA Directions also requires such minimum ticket size of Rs. 1 Crore to be seen only at the time of initial subscription. This in many cases led to the securitisation notes being broken down into smaller amounts in the secondary market.
In the absence of anything mentioned for RBI regulated entities, it can be said that there is no change with respect to the ticket size for RBI regulated entities even in the case of publicly issued SDIs which should be seen only at the time of initial subscription.
It is worth mentioning that under the SSA Directions of RBI requires that in case of transactions carried out outside of the SSA Directions (the transactions undertaken by non-RBI regulated entities), the investors which are regulated by RBI have to maintain full capital charge. This therefore discourages Banks from investing in securitisation transactions which are carried out outside the ambit of the SSA Directions. Therefore, both retail investors as well RBI regulated entities will not be the investors which will hinder liquidity and overall growth of the SDI market.
Minimum Risk Retention
Aligning with RBI’s SSA Direction, a Minimum Risk Retention (MRR) requirement for public issue of SDIs has been mandated requiring retention by the originator of a minimum of
5% in case the residual maturity of the underlying loans is upto 24 months and
10% in case residual maturity is more than 24 months
Further, in case of RMBS transactions, the MRR has been kept at 5% irrespective of the original tenure.
SEBI has aligned the entire MRR conditions with that of the RBI SSA Directions, including the quantum and form of maintenance of MRR. Accordingly, for financial sector entities, there is no change with respect to MRR.
By introducing MRR in the SDI Regulations, non-financial sector entities will be held to similar standards of accountability, skin-in-the-game, reducing the risks associated with the originate-to-sell model and aligning their practices with those of financial sector originators. This will strengthen investor confidence across the board and mitigate risks of moral hazard or lax underwriting standards.
It may however be noted here that in case of non financial originators, there could be situations where retention is being maintained in some form (for example in leasing transactions, the residual value of the leased assets continues to be held by the originator) and therefore such originators will be required to hold MRR in addition to the retention maintained.
Minimum Holding Period
SEBI has aligned the MHP conditions as prescribed under the SSA directions for all RBI regulated entities. Accordingly, there is no additional compliance requirement for RBI regulated entities. For receivables other than loans, the MHP condition will be specified by SEBI.
Exercise of Clean up Call option by the originator
The provisions for the exercise of the clean up call option has been aligned with those prescribed under the SSA Directions. These provisions have been introduced under the chapter applicable in case of public offer of SDIs. However, the SDI Regulations always provided for the exercise of clean up call option and what has been now introduced in simply the manner in which such an option has to be exercised.
In case of private placement of SDIs, can the clean up call option be exercised at a threshold exceeding 10% ?
Although the provisions for the exercise of clean up call options has been made a part of chapter applicable in case of public offers, it should however be noted that these provisions are also a part of the RBI SSA Directions. Accordingly, financial sector originators are bound by such conditions even if they go for private placement of SDIs. Further, even in the case of the non-financial sector originator, clean up call is simply the clean up of the leftovers when they serve no economic purpose. Therefore, in our view, exercising clean up calls at a higher threshold should not arise.
Periodic Disclosures to be made
On December 16, SEBI issued a circular (‘Periodic Disclosure Circular’) mandating periodic disclosures in respect of Securitised Debt Instruments (SDIs).
The disclosure requirements are effective from March 31, 2026 and are required to be made on a periodic basis within 30 days from the end of March and September each year.
The format for the disclosures has been aligned with the periodic disclosure requirements mandated by the RBI for securitisation transactions. Under the Periodic Disclosures Circular, formats have been prescribed for (i) securitisation of loans, listed SDIs, and credit facilities, and (ii) other types of exposures.
Major disclosure requirements include Maturity characteristics of the underlying assets, MHP and MRR details, rating, recovery initiatives for default cases, industry-wise and geography-wise breakups, etc.
Other Amendments
Norms for liquidity facility aligned with that of RBI regulations
All references to the Companies Act 1956 has been changed to Companies Act 2013
Chapter on registration of trustees has been removed and reference has been made to SEBI (Debenture Trustees) Regulations, 1993
Disclosure requirements for the originator and the SPDE have been prescribed; however the disclosure formats are yet to be issued by SEBI.
Public offer of SDIs to remain open for a minimum period of 2 working days and upto a maximum of 10 working days.
Amendments proposed in the SEBI(LODR) Regulations
There are primarily two regulations which govern the listing of SDIs:
SEBI SDI Regulations
SEBI LODR Regulations
The following amendments have been proposed in the LODR regulations:
SCORES registration to be taken at the trustee level
Outstanding litigations, any material developments in relation to the originator or servicer or any other party to the transaction which could be prejudicial to the interests of the investors to be disclosed on an annual basis.
Servicing related defaults to be disclosed on an annual basis.
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After over two years of implementing CG norms for HVDLE on a ‘comply or explain’ basis, a new Chapter VA has been inserted in the LODR on March 28, 2025, governing CG norms for pure HVDLEs. Among other things, the new chapter outlines the requirements relating to board and committee composition, subsidiary governance, RPT framework for HVDLEs, etc.
As regards the RPT framework, the one for HVDLE (reg 62K) introduces an additional requirement: consent from debenture holders through NOC from the debenture trustees.
This criteria has been added to fix the “impossibility of compliance”(of getting approval from unrelated shareholders for material RPTs) in case of HVDLEs as most of these have either nil or negligible unrelated shareholders. This also underscores the requirement to protect the interest of the lenders, particularly the debenture holders – aligned with s. 186(5) of the Companies Act, 2013.
However, there are a few practical implementation issues and inconsistencies, possibly arising from the CG norms (prior to the LODR 3rd Amendment in 2024) for an equity listed entity (chapter IV) being the drafting template for this new chapter. This article highlights these issues, particularly those affecting 62K, given the structure of HVDLEs.
Structural difference between HVDLE and an equity listed company
Before beginning to list such inconsistencies, it is important to highlight the structural difference between an HVDLE and an equity listed company – the very reason why a separate chapter for CG has been rolled out for an HVDLE!
HVDLEs are mostly closely held companies with all or close to all shareholders being related parties, approval from unrelated shareholders often becomes an impossibility. Further, considering that the funding to HVDLEs is by the debenture holders, protection of their interest becomes paramount. Accordingly, approval from the debenture holders have been made mandatory for undertaking any material RPTs by a HVDLE.
13.3.3 Since, both banks and debenture holders are lenders to the borrowing entity, it is felt that a similar approach should be adopted for debenture holders. This provides a layer of protection to the debenture holders who might be at risk of unfair treatment due to some RPTs which may also have an impact on the repayment capability of an entity. It is noted that the debenture holders’ interest is intended to be safeguarded by a debenture trustee [SEBI Consultation Paper date October 31, 2024]
Present exemptions – some extra; some missing
Lets now discuss the inconsistencies that needs to be fixed:
Grant of exemptions w.r.t transaction between holding company and its wholly-owned subsidiaries and among WOS does not place well with HVDLEs.
The shareholders of the holding and its WOS are effectively the same and any benefit / resources, if at all transferred to the WOS, in case of an RPT between a holding and WOS, is to consolidate in the holding company and remain within the enterprise. Therefore, such transactions are exempted u/r 23(5). But this theory holds correct in case of an equity listed company only where the interest of equity shareholders needs to be protected.
However, in a debt-listed structure, the concern shifts from the ‘enterprise’ to the individual ‘entity’. The exposure of debenture holders is required to be protected. A debenture holder may have exposure only to the WOS, not the holding company. In such case, exempting RPTs between the holding company and its WOS (or between two WOS) overlooks the distinct legal and financial obligations of each entity. The interest of debenture holder can be considered only by seeking “their” approval for a RPT. The relationship of holding company and WOS between the transacting company does not ensure any protection to the debenture holders. The exemption in 62K(7), mirroring 23(5), places debenture holders at the mercy of equity shareholders in the holding company – contradicting the spirit of the rest of Regulation 62K, which otherwise mandates their approval.
Think of a situation where a WOS (which has issued the debentures) upstreams value to its parent. While equity shareholders in the parent may remain unaffected, the WOS may be left with insufficient resources to repay its debenture obligations. Debenture holders cannot claim recourse against the parent; their exposure is limited to the WOS.
Exemptions in reg 23 brought through LODR 3rd amendment viz. w.r.t remuneration to KMPs and SMPs who are not promoters etc is missing in Reg 62K
Remuneration paid to KMP and SMP who are not promoters, payment of statutory dues, transactions between PSU and CG / SG which are exempted for an equity listed entity have not been replicated under 62K. There is no reason why these exemptions which are provided to an equity listed entity, shall not be provided to an HVDLE, when the underlying intent of these exemptions aligns with an HVDLE.
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Enterprise Level v/s Entity Level: Paradox of a Wholly owned Subsidiary
Wholly owned Subsidiaries (WoS) form a particular paradox in corporate laws with two contradictory positions – (a) the transactions entered into between the holding company and its WoS are viewed as transactions within a group, thus, permitting a seamless flow of resources between the two without any objection, looking at an “enterprise” level whereas, (b) limiting the access of the shareholders and creditors of the holding company and the WoS to the respective entity’s resources, thereby separation of the two at an “entity” level.
Disregarding ‘entity’ concept over ‘enterprise’ concept: exemptions w.r.t. WoS
Section 185 of CA 2013 exempts any financial assistance to the WoS from the compliance requirements under the section, and the limits on loans, guarantees, investments or provision of security under section 186 do not apply for transactions with WoS. Section 177(4)(iv) and 188 of CA 2013, pertaining to RPT controls, also extend certain exemptions for transactions with WoS. Reg 23(5) of SEBI LODR also exempts transactions with WoS as well as between two WoS from approval requirements, at both the Audit Committee and shareholders’ level. Reg 37A of SEBI LODR contains an exemption from shareholders’ approval requirements for sale, lease or disposal of an undertaking to the WoS. In each of the aforesaid provisions, the underlying presumption remains the same – the accounts of the WoS are consolidated with that of the holding company, and hence, the flow of resources remain within the same ‘enterprise’, despite change of ‘entity’. Thus the law takes an ‘enterprise’ wide view instead of an ‘entity’ level view while providing for such exemptions.
Factors reinforcing the concept of separation of entity
On the other hand, the outreach of shareholders of a company is limited at an ‘entity’ level, that is to say, the shareholders of the holding company do not have access to the general meetings of the WoS. Similarly, the creditors of each entity do not have any recourse against the other entity. For instance, where the holding company has outstanding dues, but there are resources at the WoS level, can the creditors reach to the assets of the WoS? The answer is no. Similarly, a vice versa situation is also not possible. In fact, under the Insolvency and Bankruptcy Code too, the assets of the subsidiary are kept outside the purview of the liquidation estate of the holding corporate debtor [Section 36(4)(d)].
Further, the board of a WoS is different from its holding company. The board of the holding company does not have any rights over the board of the subsidiary. Therefore, under these situations, transactions between the holding company and its WoS, though between companies that are 100% belonging to the same group, cannot be viewed as completely seamless or free from any corporate governance concerns.
RPTs between holding company and WoS: can the ‘enterprise’ approach be taken?
The aforesaid discussion makes it clear that while an ‘enterprise’ wide approach is taken in granting exemptions to WoS, the separation of legal entities cannot be completely disregarded, because the outreach of the shareholders, creditors and the board of directors remain limited. Now from the point of view of related party transactions, can it be argued that the transactions between a holding company and WoS are without any restraint altogether? For example, does the concept of arm’s length has no relevance in case of a transaction between a holding company and WoS?
Concept of arm’s length and relevance in transactions with WoS
A light touch regulation or inapplicability of certain controls or approvals does not mean that arm’s length precondition becomes unnecessary. If such a view is taken, then the flow of resources between the holding company and the WoS will be completely without any fetters, thus breaching the concept of corporate governance at an entity level. For instance, can the board of directors of the holding company be absolved from its responsibilities to safeguard the assets of the holding company where the same flows to the subsidiary without any consideration? The answer surely is a no. Both ‘entity’ level and ‘enterprise’ level are significant, and hence, one cannot disregard the separation of legal entities, particularly, in the context of protection of assets of the entity (also see discussion under Role of Board below).
As regards the concept of arm’s length, the same is omnipresent – required to be ensured in transactions with related parties as well as unrelated entities. The meaning of arm’s length transaction, as defined under SA 550 pertaining to Related Parties, is as follows:
A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.
Therefore, ‘independence’ and ‘own interests’ are important elements of an arm’s length transaction. If compromised in RPTs with WoS, absence of arm’s length criteria could lead to uncontrolled flow of wealth from the holding company to WoS, and may also lead to abusive RPTs.
Are WoS structures immune from abuse?: Deploying WoS as a stop-over for abusive RPTs
The exemptions w.r.t. transactions with WoS make the same prone to misuse, through use of the WoS as a conduit or a stop-over for giving effect to arrangements with non-exempt RPs. For instance, a listed entity in the FMCG sector is required to provide financial assistance to its upstream entities (promoter group entities). There may be a lack of business rationale and commercial justification for such a transaction, and therefore, it is highly unlikely that such a transaction would get the approval of the AC. Therefore, in order to give effect to the transaction, the company may route the same through its WoS, and thus escape RPT controls at its AC level. The WoS may, in turn, pass on the benefit to the promoter group entities, through a series of transactions, in order to cover the real character of the transaction (see figure below).
A guidance note published by NFRA also, requires identification of indirect transactions, including through ‘connected parties’. In order to ensure no such indirect transactions have occurred, the management is expected to establish procedures to identify such transactions, and to obtain periodic confirmations from the directors, promoter group, large shareholders and other related parties that there are no transactions that have been undertaken indirectly with the listed company or its subsidiaries or its related parties.
Role of board
The role of the board towards avoiding conflicts of interests is deep-rooted under the corporate laws and securities laws, under various applicable provisions. For instance, the directors have a responsibility towards safeguarding the assets of the company and for preventing and detecting fraud and other irregularities [Section 134(5)(c) of CA 2013]. Section 166 of CA 2013 specifies the duties of directors. These include, among others, the duty to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company [Section 166(2)].
The key functions of the board, as contemplated under Reg 4 of LODR, also includes monitoring and managing potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions.
Scope of Exemption under Applicable Laws
As stated above, Reg 23(5) of SEBI LODR exempts RPTs entered into between a holding company and its WoS from the approval requirements of both the AC and the shareholders.
Apart from Reg 23 of LODR, the RPT provisions are contained under Section 177 and 188 of CA 2013. Under section 177(4)(iv) of CA 2013, all RPTs require approval of the AC. The fourth proviso to the said sub-section exempts RPTs entered into with WoS from AC approval requirements. However, the said exemption is not absolute. The proviso reads as follows:
Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.
Thus, the exemption for RPTs with WoS does not apply in case of a transaction referred u/s 188 of CA 2013. In other words, where an RPT with WoS triggers approval requirements u/s 188, the same will also be required to be approved by the AC u/s 177 first.
Meaning of “a transaction referred to in section 188”
Section 188(1) of CA 2013 provides a list of 7 types of transactions. The list is wide enough to cover almost all types of transactions, except financial assistance in the form of loans etc. However, section 188 becomes applicable, only, in cases where any one or more of the two most crucial elements of a transaction are missing – (i) ordinary course of business and (ii) arm’s length terms. In cases where a transaction does not meet the ordinary course of business or the arm’s length criteria, the same is referred to the board of directors u/s 188 of CA 2013, and requires prior approval of the board.
The fifth proviso to section 188(1) also contains an exemption for RPTs between the holding company and its WoS. Note that the said exemption is applicable only with respect to the approval of the shareholders, the approval of board is still required for RPTs that lack one of the two elements stated above, even though with WoS.
Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution:
XXX
Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval:
The conditional exemption given u/s 177 and the absence of any exemption from board’s approval u/s 188 clearly confirms the requirement of ensuring arm’s length terms in transactions with WoS.
Expectations from AC
The AC is the primary decision-making authority in respect of matters relating to related party transactions. NFRA, the audit regulator of the country, has published the Audit Committee – Auditor Interactions Series 3 dealing with audit of Related Parties. The guidance sets out potential points on which the AC may interact with the auditors in the context of RPTs. Where a company avails exemptions w.r.t. AC and shareholders’ approval, the guidance note requires documentation of the rationale for not obtaining Audit Committee’s and Shareholders’ approvals.
Thus, the AC is expected to be the scrutinising authority in ensuring that the terms on which a transaction is proposed to be entered into with a WoS are at an arm’s length, which, in turn, would require bringing the transaction before the AC, if not for approval, then for a pre-transaction scrutiny and information.
Disclosures in financial statements
Ind AS 24 pertaining to Related Party Disclosures require disclosures to be made in the financial statements that the RPTs were made on terms equivalent to those that prevail in arm’s length transactions. However, such disclosure can be made only if such terms can be substantiated. Note that the Ind AS 24 does not contain any exemption for WoS. In the absence of a strict scrutiny of RPTs with WoS for satisfaction of arm’s length basis of the terms of the transaction, such an assertive statement in the financial statements for arm’s length of the terms is not possible.
Dealings with WoS: the suggested approach
In view of the expectations from the AC, board and the auditors, and the potential risks of abusive RPTs using WoS as an intermediary, the following approach may be undertaken before entering into a transaction with WoS:
A pre-transaction scrutiny may be conducted by the AC for RPTs to be entered into between the holding company and its WoS. This should include all the necessary details as may be required by the AC, such as, nature of transaction, terms of the transaction, total expected value of the transaction etc.
Based on such scrutiny, the AC may give its comments or recommendations where the same has any concerns. Necessary modifications may be carried out to address the comments of the AC, in order to make the transaction commercially viable for the holding company.
Where the proposed transaction is not in (a) ordinary course of business or (b) not at an arm’s length basis, the same will require approval of the AC. The AC will refer the transactions to the board for approval u/s 188.
Every RPT entered into between the holding company and its WoS should, as a part of the quarterly review, be reported back to the AC. Any alteration in terms or value of the transactions should be brought to the notice of the AC.
As required under Reg 23(9) of the LODR, the transactions with WoS to be reported to the SEs on a half-yearly basis.
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