Sebi notifies new rules governing related-party transactions

Markets regulator Sebi has made sweeping changes to strengthen the monitoring and enforcement of norms pertaining to related-party transactions.

The regulator has tweaked the definition of 'related party' and 'related-party transactions' (RPTs), according to a notification issued on Tuesday.

It made changes to the process followed by a company's audit committee for approval of RPTs that are material. Further, there will be a format for reporting of RPTs to the stock exchanges.

Cases like Zee, Dish TV and the recent ruling by NCLT in the Videocon case might have probably triggered changes in the RPT framework.

According to experts, any transaction benefiting a related party (even indirectly) will need the approval of the audit committee and shareholders of a listed company. When the transaction is with a third party but may benefit related party will be difficult to identify and can sometimes lead to unnecessary allegations of violation on corporates.

Under the new rules, Sebi said the related party will be any person or entity belonging to the promoter or promoter group of the listed entity.

Besides, any person or any entity, directly or indirectly (including with their relatives), holding 20 per cent or more of the holding in the listed entity during the preceding fiscal and 10 per cent or more with effect from April 1, 2023, will be considered as a related party.

Prior approval of the shareholders of the listed entity will be required for material RPTs having a threshold of lower than Rs 1,000 crore or 10 per cent of the consolidated annual turnover of the listed entity.

Sebi said approval of the audit committee will be required for all RPTs and subsequent material modifications as defined by the audit committee.

In addition, approval will be needed for RPTs where the subsidiary is a party but the listed entity is not a party. This is subject to a threshold of 10 per cent of the consolidated turnover of the listed entity and 10 per cent of the standalone turnover of the subsidiary from April 1, 2023.

Generally, RPT means a transaction involving a transfer of resources, services between the listed entity or its subsidiaries on the one hand and a related party of the listed entity or its subsidiaries on the other hand.

Also, the transaction between the listed entity or its subsidiaries and any other entity that is aimed to benefit a related party will be considered an RPT.

In addition, the transaction between 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 from April 1, 2023, will also be considered RPT.

Sebi said that enhanced disclosure of information related to RPTs will be placed before the audit committee. The disclosure will be provided in the notice to shareholders for material RPTs.

In addition, such disclosure needs to be made to the stock exchanges every six months in the format specified by Sebi within 15 days from the date of publication of financial results.

The amendments will come into force with effect from April 1, 2022.

In January 2020, there was a concept paper issued by Sebi overhauling RPT framework but probably because of COVID-19 and industry sentiments this discussion was on the back burner as the industry had many reservations about it.

To give effect to the new rules, Sebi has amended the LODR (Listing Obligations And Disclosure Requirements Obligations) Regulations.