Stocks

Related party deals: SEBI lists down details to be shared with audit committee, shareholders

K.R.Srivats New Delhi | Updated on November 23, 2021

Regulator also specifies reporting format for disclosures

Market regulator SEBI has come out with a detailed prescription of the information that a listed company should provide to its audit committee for approval of any proposed Related Party Transactions (RPTs).

Sweeping changes

It has also specified the information that should form a part of the explanatory statement in the notice sent to shareholders for seeking approval of any proposed RPT. SEBI has also now specified the format for reporting of RPTs for the stock exchanges.

This latest SEBI move, which will come into effect from April 1, 2022, comes on the heels of the market regulator notifying new rules governing related party transactions. SEBI had as part of the sweeping changes tweaked the definition of ‘related party’ and ‘related party transactions’.

It made changes to the process followed by a company’s audit committee for approval of RPTs that are material. With the recent SEBI changes on the RPT framework, any transaction benefiting a related party (even indirectly) will need the approval of the audit committee and shareholders of a listed company.

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, 2022 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 lower than ₹1,000 crore or 10 per cent of the consolidated annual turnover of the listed entity.

SEBI had also said that approval of the audit committee will be required for all RPTs and subsequent material modifications as defined by the audit committee. A RPT is 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.

Experts’ Take

Gaurav Dayal, Partner Lakshmikumaran & Sridharan Attorneys, said SEBI has sought to widen the net of the monitoring and reporting framework for RPTs.

“Overall, the changes seem to be aimed at plugging the loopholes in the past framework as well as increased oversight by the audit committee. The real effect of these changes will depend on how the audit committees implement and interpret them while approving RPTs,” he said.

Moin Ladha, Partner, Khaitan & Co said, “While the amendments aim to ensure better corporate governance and availability of relevant material to be considered by audit committees before granting its approval, this will certainly increase their time and effort involved in case of complex transactions.”

Published on November 23, 2021

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