Market regulator SEBI has finally plugged the loop hole on related party transactions (RPTs). From April 1, all listed companies will require shareholder approval for any material RPTs. Also, RPTs approved before April 1 but effective or continuing after the date will require shareholders’ approval as per a clarification by SEBI.

India’s leading industry bodies like the Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry ( FICCI) have expressed concerns about the new guidelines recently. However, SEBI has brushed them aside citing shareholder interest.

RPTs refers to a deal or arrangement made between two parties who are joined by a pre-existing business relationship or common interest. The Companies Act, 2013 defines RPTs mainly between a company and its related entity involving key managerial personals or their relatives and close associates.

Similarly, it applies to the promoters of the company.  Large companies having RPTs worth hundreds and thousands of crores avoided taking shareholder approvals for the deals on the grounds that the transactions were at arms length and not material. 

In fact, many companies also got long-term RPTs approved before April 1 to avoid shareholder approvals with a view that SEBI’s new rules will be applicable in a prospective manner only after the notification and rollout of the norms. 

“All existing material related party contracts or arrangements entered into prior to the date of notification of these regulations and which may continue beyond such date shall be placed for approval of the shareholders in the first General Meeting subsequent to notification of these regulations. Transparency, accountability and shareholder empowerment are the bedrock of robust corporate governance. Listed entities, therefore, ensure to comply with the spirit of the law and endeavor to provide relevant and detailed information to enable and empower shareholders for taking an informed decision,” SEBI said. 

SEBI further said that a RPT for which the audit committee has granted omnibus approval, should continue to be placed before the shareholders if it is material in terms of Regulation 23 (1) of the Listing Obligation and Disclosure Requirements (LODR) Regulations. 

According to SEBI, explanatory statement sent to shareholders for seeking approval for an RPT should provide relevant information so that they can take a view whether the terms and conditions of the proposed RPT are not unfavorable to the listed entity, compared to that of transactions between two unrelated parties.

How it affects large companies

According to SEBI rules, the audit committee’s approval would be required if the value of RPT is exceeds 10 percent of the annual turnover of the listed company or if the transaction is above ₹1,000 crore. For the large companies the worry is that RPT and approval process could take up to 45 to 60 days and the ₹1,000 crore threshold puts them in a spot since their small contracts would also become time consuming.

According to the SEBI circular, the listed entity shall provide the following information to Audit Committee for approval of a RPT -

(1) Type, material terms and particulars of the proposed transaction

(2) Name of the related party and its relationship with the listed entity or its subsidiary, including nature of its concern or interest (financial or otherwise)

(3) Tenure of the proposed transaction (particular tenure should be specified)

(4) Value of the proposed transaction

(5) The percentage of the listed entity’s annual consolidated turnover, for the immediately preceding financial year, that is represented by the value of the proposed transaction (and for a RPT involving a subsidiary, such percentage calculated on the basis of the subsidiary’s annual turnover on a standalone basis should be additionally provided);

(6) If the transaction relates to any loans, inter-corporate deposits, advances or investments made or given by the listed entity or its subsidiary:

(i) details of the source of funds in connection with the proposed transaction

(ii) where any financial indebtedness is incurred to make or give loans, inter-corporate deposits, advances or investments, nature of indebtedness; cost of funds; and tenure

(iii) applicable terms, including covenants, tenure, interest rate and repayment schedule, whether secured or unsecured; if secured, the nature of security; and iv) the purpose for which the funds will be utilized by the ultimate beneficiary of such funds pursuant to the RPT

(7) Justification as to why the RPT is in the interest of the listed entity

(8) A copy of the valuation or other external party report, if any such report has been relied upon

(9) Percentage of the counter-party’s annual consolidated turnover that is represented by the value of the proposed RPT on a voluntary basis

(10) Any other information that may be relevant

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