New Dimension to Related Party Transactions Analysis of SEBI’s Amendment and Improvement of Governance and Transparency

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Related Party Transactions (RPT) Analysis of SEBI’s Amendment and Improvement of Governance and Transparency

[2022] 134 taxmann.com 150 (Article)

Introduction

When a company particularly listed entities are operating and as a part of its business transaction, it may be required to transact with related parties be it business or providing loan or security etc. Unless the company adopts a good governance, it will be very difficult to protect the interest of minority shareholders and other stakeholders. Further, good governance is also required for the ultimate survival and sustainability of the listed entity which is having related party transaction. To address this issue and also in order to enhance the transparency and to provide checks, a Working Group was set up by SEBI in 2019 to recommend specific issues pertaining to related party transactions. Based on the Group’s recommendations, SEBI amended the SEBI (Listing Obligation and Disclosure Requirements) Regulations in a significant manner, primarily in the area of definition of related party, related party transactions, new concept viz., materiality threshold, disclosure requirements and the various approvals to be accorded by the Audit Committee and also by the shareholders.

Applicability

SEBI in its board meeting dated 28th September 2021, has inter alia, considered and approved amendments to the Listing Regulations on Related Party Transactions (RPTs). The changes suggested by SEBI would be applicable in a phased manner viz., some will be applicable w.e.f. 1st April, 2022 and some will be applicable w.e.f. 1st April, 2023.

Amendments to Related Party Transactions

Definition of related party would include:

(a) All persons or entities forming part of a promoter or a promoter group irrespective of their shareholding.

(b) Any person/entity holding equity shares in the listed entity as below, either directly or on a beneficial interest basis at any time during the immediately preceding Financial Year:

i. To the extent of 20% or more (w.e.f. 1st April, 2022)

ii. To the extent of 10% or more (effective 1st April, 2023)

Comments

The threshold limit is taken into account not only direct shareholding but also beneficial interest, which will include more transactions and with the reduction of threshold limit from 20% to 10% w.e.f. 1st April, 2023 will likely to increase the number of transactions under the definition of related party.

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