Financial or even service-related transactions by any subsidiary of a listed company may come under heavy scrutiny by the markets regulator, a SEBI paper reviewed by BusinessLine shows.
After it came to light in the IL&FS scam that the company had used its subsidiaries as a conduit to extend loans to related parties and other group companies, a SEBI working group has now recommended that transactions by subsidiaries of listed companies also be included in the definition of related party transactions (RPTs).
Further, the working group has recommended that the audit committee of a listed company share incremental onus and responsibility for RPTs. It has suggested a long check-list that the committee will have to fulfil before approving RTPs.
Also, if a decision of the audit committee on an RPT is unanimous, disclosures in this regard have to be made.
Far-reaching impact
The new norms say that anybody in the promoter group, irrespective of their shareholding (or even with nil shares), will be considered a related party. Earlier, the Kotak committee had recommended that those in the promoter group holding 10 per cent or more should only come under RPT.
The new rules go a step further, saying that anybody with a stake of 20 per cent or more –irrespective ofwhether they are part of the promoter group or not – will have to follow the RPT norms.
Sweeping changes
These are sweeping changes, experts say. The audit committee has to check each and every transaction and the entity’s complete profile –including debt and investments –even before it enters into transactions with the subsidiaries of listed companies.
RPTs now have to follow additional shareholder and regulatory approval processes and face greater scrutiny. There have been several instances in the past where the promoters of listed companies have transferred cash to unlisted subsidiaries and extended loans to their related parties to avoid scrutiny.
Kanak Resources Management, a company controlled by IL&FS subsidiary IL&FS Environmental Infrastructure and Services, took nearly Rs 100 crore in short-term loans from group companies over a couple of years and disbursed it to related parties, investigations have revealed.
Defining RPT
Per the SEBI working group, RPT should mean “A transaction involving a transfer of resources, services or obligations between the listed entity or any of its subsidiaries on the one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or the listed entity or any of its subsidiaries on the 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.” There was no subsidiary involved in the earlier definition of RPT.
Further, the working group has said that a subsidiary and listed company should be considered to have entered into an RPT “regardless of whether a price is charged or not”. “Such a ‘transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract,” it says.
What’s exempt from RPTs
But it has been recommended that the ”issue of specified securities on a preferential basis that is subject to SEBI norms, payment of dividend, subdivision or consolidation of securities like through rights issue, bonus issue and buy-back, should all be exempt from RPTs”.
“All related party transactions and subsequent material modifications shall require prior approval of the audit committee of the listed entity. Provided that a related party transaction to which the subsidiary of a listed entity is a party, but the listed entity is not a party, shall require prior approval of the audit committee,” the recommendations say.
Further, the recommendations say, approvals are needed from the audit committee in respect of the proposed transaction, justifying why it is in the interest of the listed entity. The committee also needs to specify if the transaction relates to any loans, inter-corporate deposits, advances or investments made or given by the listed entity or its subsidiary.