On November 9, 2021, the SEBI (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021 (RPT Amendments) have been notified by SEBI to further tighten the provisions governing related party transactions (RPT Provisions).

By way of a brief background, the proposals for further amendment of the RPT Provisions were made under the Report of the Working Group on Related Party Transactions dated January 27, 2020. SEBI, in its board meeting held on September 28, 2021, approved some of the proposed amendments to the RPT Provisions which has now been notified by way of the aforementioned amendment. The amendments to the RPT Provisions are effective from April 1, 2022, except in certain cases where the amendments are effective on April 1, 2023. We have set out below the key changes made by the RPT Amendments along with the consequences / implications to be considered by listed companies.

Key Changes

1. Definition of “related party”

Previously, the definition of related party included persons / entities belonging to the promoter group of the listed company only if such persons / entities held atleast 20% of the shareholding in the listed company.
The RPT Amendments have sought to remove the threshold of 20% on the basis that a promoter, irrespective of his / her shareholding in the company, exercises control (including through other entities forming part of the promoter group) over the listed entity and accordingly, every person / entity forming part of the promoter group of the listed company should be a related party.

Whilst persons exercising control or influence over the listed entity are already categorized as related party under the unamended RPT Provisions, the amendment seeks to ensure that any person or entity forming a part of the promoter group but holding less than 20% and arguably, not in “control” of the target entity is not excluded from the purview of ‘related party’ as this could be misused to undertake transactions with such entity (since such entity is eventually controlled by the promoter).

Further, any person (other than promoter or promoter group) holding atleast 20% shareholding in the listed company (whether directly or through beneficial ownership) will also be a related party. The threshold of 20% will be reduced to 10% with effect from April 1, 2023.

The other categories of related parties remain unchanged.

2. Scope of “Related Party Transactions”

SEBI has been concerned with structures implemented to benefit related parties, but which technically did not fall within the purview of the unamended RPT Provisions. Under the unamended RPT Provisions, a related party transaction meant “a transfer of resources, services or obligations between a listed entity and a related party”. This means that technically, only if the transaction involves or is with a listed entity, then such transactions are categorized as related party transactions. In effect, this would exclude transactions wherein a subsidiary is involved in a transaction (instead of the listed company) or wherein the transaction is with a third party but for the benefit of a related party (such as in case of providing collaterals for benefit of a related party, extension of funds to a third party which is eventually provided to a related party etc.).

The intent of the law is to ensure that transactions undertaken for the benefit of a related party are brought within the scrutiny of the RPT Provisions, irrespective of the actual parties undertaking the transaction.
Accordingly, the RPT Amendments now define a related party transaction to mean a transfer of resources, services or obligations between the following:

1. Listed entity and its related party
2. Subsidiary of listed entity (including unlisted subsidiary and subsidiary outside India) and related party of such
subsidiary
3. Listed entity and related party of any of its subsidiaries
4. Subsidiary and related party of the listed entity or any of its other subsidiaries
5. Transactions undertaken by the listed entity or subsidiary which has the “purpose” and “effect” of benefiting the
related party of the listed entity or its subsidiaries (with effect from April 1, 2023).

The definition is wide enough and whilst the intent is to ensure that value/cash strapping transactions for the benefit of related parties are scrutinized under law, a number of other transactions (bona fide or in ordinary course) may also be impacted by these amendments. For instance, purchase and sale of goods intra group (between two subsidiaries) would also fall within the purview of the RPT Amendments now – though there is an exemption for transactions between two wholly owned subsidiaries of the listed entity, there is no exemption for transactions involving subsidiaries which are not wholly owned by the listed entity. Payment of remuneration to directors by the subsidiary would also get captured within the expanded scope of the definition by way of the RPT Amendments.
In this regard, please note that the RPT Amendments carve out certain transactions from the purview of “related party transactions” such as preferential allotment to related parties if undertaken in accordance with applicable laws, corporate actions such as payment of dividend, buy back of securities etc. if offered to all shareholders proportionately.

3. Additional Compliances

Shareholder approval
Material related party transactions require prior approval from shareholders of the listed entity, wherein the related parties (irrespective of their interest in the transaction under consideration) are not permitted to vote.
A related party transaction is material if, on an individual or aggregate basis with other such transactions in a financial year, its value is greater than 10% of the consolidated turnover of the listed company basis its last audited financial statements. The RPT Amendments now provide for a related party transaction to be material if it exceeds: i) INR 1000 crores; or (ii) 10% of the consolidated turnover of the listed entity as per its last audited financial statements, whichever is lower.

If the material related party transaction involves only a listed subsidiary and not the listed entity and the listed subsidiary is required to comply with the RPT Provisions / RPT Amendments, then the approval of shareholders of the listed entity will not be required and the compliance will be undertaken with the RPT Provisions at the listed subsidiary level itself.

Audit Committee approval

Under the RPT Provisions, all related party transactions are required to be approved by the audit committee of the listed entity. Pursuant to the RPT Amendments, any material modification to such transaction will also be required to be approved by the audit committee and the shareholders (if the underlying transaction qualified as a material related party transaction in the first place).

In this regard, the audit committee will be required to define the scope of “material modifications” and the same shall be included in the policy for determining materiality of related party transactions and on dealing with related party transactions (Policy). Indicatively, the scope of material modification may relate to the value of the transaction, the purpose of the transaction, parties with whom the transactions are taking place and the time period within which the transaction is meant to be undertaken.

Whilst the audit committee will approve all related party transactions with the listed company, in cases where the listed company is not a party but an subsidiary is a party to the related party transaction, the audit committee of the listed company will be required to approve such a transaction if the value of such transaction (whether entered into individually or along with previous such transactions during a financial year): (i) exceed 10% of the consolidated turnover basis the last audited financials of the listed entity upto April 1, 2023; or (ii) exceed 10% of the standalone annual turnover of the subsidiary basis its last audited financials, on and after April 1, 2023. If such subsidiary in question is a listed subsidiary which is required to comply with the RPT Provisions / RPT Amendments, then the approval of the audit committee of the listed entity will not be required (assuming that the listed entity is not a party to the transaction) and the compliance will be undertaken with the RPT Provisions at the listed subsidiary level itself.

Disclosures

As per the unamended RPT Provisions, listed entity is required to submit disclosures pertaining to related party transactions within 30 days of the half yearly disclosure of standalone and audited financials. This time period has now been reduced to 15 days upto April 1, 2023 and post April 1, 202, such disclosure has to be made along with disclosure of the half yearly standalone and audited financials. Further, the format of the disclosure is expected to change – the new format is awaited to be notified by SEBI.
Implications

With increased governance, there is also an increase in the obligation to ensure compliance with the legal provisions. Listed companies will need to systematically undertake the following action plan to ensure compliance with the RPT Amendments:

1. Amendment to the Policy to align the same to the RPT Amendments and introduce the scope of “material modifications.”
2. Identification of “related parties” for the listed company as well as the subsidiaries (including offshore
subsidiaries).
3. Review of arrangements involving subsidiaries of the listed companies (including offshore subsidiaries, if any) to
check if the same would fall within the scope of “related party transactions” and the quantum involved / expected to
be involved in such transactions.

Please also note that compliance with the RPT Amendments is in addition to compliances required under Section 188 of the Companies Act, 2013 for the unlisted subsidiary.