SEBI Notifies Changes To Related-Party Transactions

Market regulator SEBI has notified several changes to its Listing Regulations which were approved by its board in September this year.

The changes are largely in line with what the Securities and Exchange Board of India had announced just over a month ago. They revolve around broadening the definition of 'related party' and 'related-party transaction' and tighter scrutiny of such transactions.

Promoter and promoter group entities, irrespective of their shareholding, will be considered as related parties. So far, promoter entities holding 20% or more in the listed entity were considered as a related party.

Further, any entity who, directly or on a beneficial interest basis, holds 20% or more in the listed entity will be considered as a related party. Effective April 1, 2023, this will become 10%.

Related-party transactions, too, have been redefined to expand and clarify their ambit.

Effective April 1, 2023, RPTs will now be transactions between:

• The listed entity/its subsidiaries and a related party of the listed entity/its subsidiaries.

• The listed entity/its subsidiaries and any person/entity, the purpose and effect of which is to benefit a related party of the listed entity/its subsidiaries.

Such transactions will qualify as RPTs regardless of whether a price is charged. Also, a transaction with a related party shall be construed to include a single transaction or a group of transactions in a contract.

Trilegal's Shruti Rajan had earlier said on BloombergQuint that overall, the audit committee’s review of related-party transactions, its fastidiousness in ascertaining the “purpose and effect” of a transaction and continuing efforts to maintain the rigour of scrutiny over the entire group’s transactions will be important to the success of these changes.

The SEBI notification specifies some helpful carve-outs from the RPT definition, namely-

• Preferential issues

• Corporate actions uniformly offered to all shareholders such as subdivision or consolidation of securities; rights or bonus issue; and buybacks.

Finally, the notification reiterates the materiality threshold for RPTs as approved by SEBI in September.

All material RPTs require shareholder approval. And the regulations allowed the audit committee to grant omnibus approval to RPTs if certain conditions were met.

Two changes have been made here:

• So far, a transaction with a related party was considered material if it exceeded 10% of annual consolidated turnover of the listed entity. Now, RPTs that cross Rs 1,000 crore or 10% of the consolidated annual turnover, whichever is lower, will be considered material.

• Any subsequent material modifications to an RPT will need to be approved by the audit committee and shareholders.