In the Indian legislative and regulatory framework, disclosure and compliance requirements for Related Party Transactions (RPTs) are governed by the Companies Act, 2013 & Rules made thereafter and SEBI (Listing Obligations and Disclosure Requirements(LODR) Regulations, 2015 for listed companies. On September 28, 2021, the SEBI Board considered and approved the amendments to SEBI LODR Regulations, 2015, in relation to regulatory provisions on RPTs.
Pursuant to amendment, the definitions and scope of RPTs has been widened by SEBI, effective April 2022, necessitating increased disclosure and audit committee approvals. The amendment further widens the scope of the RPTs from April 2023 onwards.
Analysis of the amendment
|Existing provisions - SEBI LODR Regulations, 2015||SEBI LODR Regulations - post amendment dated 28 September 2021|
|Definition of related party|
|Only those persons/entities in the promoter category who owned 20 per cent or more stake considered to be a related party.||
The definition of related party shall include:
1. all persons or entities forming part of promoter or promoter group irrespective of their shareholding;
2. any person/entity holding equity shares in the listed entity, as below, either directly or on a beneficial interest basis at any time during the immediately preceding financial year:
|Our comments: The amended definition requires listed entities to extensively map out all related parties and ensure complete coverage and classification entities having common interests.|
|Definition of RPTs|
|As per existing provisions, RPTs involve a transfer of resources, services or obligations between a listed entity and a related party||
Post amendment, the transactions entered between the following entities have been included in the ambit of RPTs as well:
1. The 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. The listed entity or any of its subsidiaries on one hand, and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries w.e.f. April 1, 2023.
|Our comments: Definition of related party transactions is expanded in a manner to place the onus on the management to disclose any transaction which is aimed at directly/indirectly benefitting a related party even though the transacting parties are unrelated. However, identifying/establishing such transactions benefiting a related party could be a strenuous task for the management as it may be challenging for companies to identify the “benefit” derived to a related party.|
|Threshold for material RPTs which require shareholder approval|
|10% of annual consolidated turnover||Lower of INR 1,000 crore or 10% of the consolidated annual turnover of the listed entity.|
|Our comments: This amendment expands the scope of shareholder approval and condenses the potential conflict with their interests.|
|Increased requirement of audit committee approval|
|All RPTs as defined under the LODR require prior approval of audit committee under existing provisions||
The approval of the Audit committee shall be required for:
1. All RPTs and subsequent material modifications as defined by the Audit committee;
2. RPTs where the subsidiary is the transacting entity, subject to the threshold of:
|Our comments: Onus has been placed on the audit committee being one of the upholders of governance and adds administrative burden on them to ensure all these are conducted at ‘arm’s length’ and in accordance with law.|
|All equity listed entities are required to disclose to stock exchange, all material RPTs quarterly along with the compliance report on corporate governance within 30 days from the date of publication of standalone and consolidated financial results for the half year.||
Enhanced disclosure of information related to RPTs for all listed entities are required to be:
1. Placed before the audit committee,
2. Provided in the notice to shareholders for material RPTs, and
3. Provided to the stock exchanges every six months in the format specified by the Board with the following timelines:
|Our comments: The amended regulations mandates listed entities to adhere to an enhanced disclosure requirement that are executed, documented and approved transparently.|
The broadened definitions of related party and RPTs coupled with the reduced threshold for audit committee approvals, especially the threshold applicable from April 2023, is expected to increase the number of transactions covered under the RPT governance net. This might be seen immediately as an additional burden on companies that are now obligated to revisit their entire RPT governance process. However, the new rules are pivotal in refocusing on any potential gaps in the existing governance framework of companies which protects the pillars of governance namely fairness, documentation, transparency and accountability.
Adopting and implementing end-to-end best practices in related party governance, from identifying related parties, laying down transparent approval processes, determining arm’s length and maintaining robust documentation, maximises shareholder confidence and corporate brand value. SEBI’s reformed rules tightens the regulatory framework around RPTs to foster a culture paving path towards good corporate governance upheld in spirit and not just in letters.
Grant Thornton Bharat has a team of seasoned professionals who assist leading companies across verticals including financial services, real estate, manufacturing and consumer, in undertaking RPT review and benchmarking from Corporate Governance perspective.