The Securities and Exchange Board of India (SEBI) on 9 November 2021 notified the SEBI (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021 (Amended Regulations) modifying the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The Amended Regulations mainly pertain to expanding the definition of Related Party (RP) and Related Party Transactions (RPTs) and provide for certain framework in view of the amendments.

The key highlights of the Amended Regulations are summarised below:

Definition of Related Party

• According to revised definition, the below mentioned set of persons will be regarded as RP:
  • All persons or entities belonging to the promoter or promoter group of the listed entity;
  • Any person or entity holding 20% of more of equity shares in the listed entity, directly or on a beneficial interest basis; and
  • Any person or entity holding 10% of more of equity shares in the listed entity, directly or on a beneficial interest basis (with effect from 1 April 2023).

Definition of Related Party Transaction

• According to revised definition of RPT, the below mentioned set of transactions (single or group of transactions) will be regarded as RPT. A transaction between:

  • Listed entity and its RP;

  • Subsidiary of listed entity and RP of listed entity;

  • Listed entity and RP of its subsidiary company;

  • Subsidiary of listed entity and its RP;

  • Listed entity and any other person or entity for the purpose and benefit of a RP of the listed entity or its subsidiary (with effect from 1^st April 2023); and

  • Subsidiary of listed entity and any other person or entity for the purpose and benefit of a RP of the listed entity or its subsidiary (with effect from 1^st April 2023).

Transactions exempted from the definition of Related Party Transactions

• Preferential issue of securities in compliance with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
• Transactions that are uniformly applicable/offered to all shareholders in proportion to their shareholding like Issue of dividend, subdivision or consolidation of securities, issue of securities by way of rights issue or bonus issue, buy-back of securities.
• Acceptance of fixed deposits by banks / Non-Banking Finance Companies at the terms uniformly applicable/offered to all shareholders/public.

Materiality of Related Party Transactions

• A transaction with a RP which exceeds the limit of INR 1000 crore or 10% of annual consolidated turnover of the listed entity (whichever is lower), shall be considered as ‘Material’ RPT.

Prior approval of Audit Committee

• Audit Committee, while granting its approval to RPTs, must define ‘material modifications’ and disclose it as part of the policy on materiality of RPTs and on dealing with RPTs.  

• RPTs, to which the subsidiary of a listed entity is a party, but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction (individually or taken together with previous transactions) exceeds

  • 10% of annual consolidated turnover and

  • 10% of annual standalone turnover of the subsidiary (with effect from 1^st April 2023)

Exemption from prior approval of Audit Committee and shareholders for certain transactions

• Prior approval of Audit Committee is not required for a transaction to which listed subsidiary is a party, but the listed entity is not a party. However, in case of unlisted subsidiary, prior approval of Audit Committee of the listed subsidiary shall suffice.

• All material RPTs requires prior approval of shareholders through a resolution except for the transactions to which the listed subsidiary is a party, but the listed entity is not a party. However, in case of unlisted subsidiary, prior approval of shareholders of the listed subsidiary shall suffice.

• Prior approval of Audit Committee and shareholders is not required in case of a transaction between two wholly owned subsidiaries of the listed holding company.

Disclosure

• A listed entity shall disclose RPTs to the stock exchanges in the specified format within 15 days from the date of publication of its half yearly standalone and consolidated financial results. Further, with effect from 1 April 2023, the same shall be done on the date of publication of its standalone and consolidated financial results. However, a ‘high value debt listed entity’ shall submit such disclosures along with its standalone financial results for the half year.

BDO Comments

Bringing ‘all persons or entity belonging to the promoter or promoter group’ in the ambit of RP, irrespective of their shareholding, will minimise the chances of misusing such persons or entity for entering a transaction. Also, by expanding the purview of RPT, the intention of the law is clear that transaction undertaken, even indirectly, for the benefit of a RP, will be brought under scanner. With this Amended Regulations, there is further added governance and compliance obligation on the companies.