SEBI has proposed a tighter framework for related party transactions (RPTs) carried out by companies.
RPTs of material subsidiaries may require audit committee approval when transactions exceed 10 per cent of the subsidiary’s standalone turnover. Shareholder nod will also be required if these transactions cross the materiality threshold — ₹1,000 crore or 10 per cent of the listed entity’s consolidated turnover.
RPTs are defined as transactions between related parties which involves transfer of resources, services or obligations between them regardless of whether a price is charged.
Transactions with a related party of the subsidiary — even if it is not a related party of the listed entity — will now fall under the ambit of related party transactions, following the regulator’s clarified definition, said Binoy Parikh, Executive Director, Katalyst Advisors.
This means shareholder approval of the listed entity will be required if materiality thresholds are breached when its subsidiaries engage in transactions with their JV partners. Such transactions will be at the mercy of public shareholders, impacting timelines.
“Joint venture entities, particularly in SEBI-, RBI-, or IRDAI-regulated sectors, are expected to face greater scrutiny given their complex inter-company dealings and capital flows,” said Parikh.
At present, the applicability of RPT norms is restricted to related parties of listed entities and does not include a transaction between a subsidiary of a listed entity and a party which is not a related party of the listed entity.
Statutory auditor
SEBI may specify the eligibility criteria for appointment of statutory auditor, including qualifications and experience, which will need to be commensurate with the size and requirements of the listed entity.
“This will ensure that the size of the audit firm matches with the requirements of the listed entity in terms of human resources, their qualifications and experience,” said Gaurav Pingle, a practising Company Secretary.
In 2023, short-seller Hindenburg Research had pointed out that the independent auditor for Adani Enterprises and Adani Total Gas was a tiny firm, hardly capable of complex audit work.
“The aspect relating to the appointment of auditors takes into cognizance recent events that have come to the fore,” said Yashesh Ashar, Partner, Illume Advisory.
Appointment or re-appointment of statutory auditors and secretarial auditors will have to be accompanied by disclosure of minimum information to the audit committee, board of directors and shareholders.
Secretarial compliance
The Annual Secretarial Compliance Report may have to be disclosed as part of the annual report of listed entities. Regulation 48 of listing norms may be amended to require listed entities to comply with applicable secretarial standards. Change or resignation of a secretarial auditor may be deemed a material event under schedule III of listing norms. Total fees paid and change of secretarial auditor will need to be disclosed during the financial year.