According to statistics, family-owned companies account for the majority of all enterprises in India, accounting for a substantial part of total employment. Unlike transactions involving third parties, the specific relationship between the persons transacting distinguishes a Related Party Transaction, which, if abused, can have catastrophic implications. Related Party Transactions (RPTs) may result in an actual or perceived conflict of interest between the company and its shareholders.
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Key Abstract
The Securities and Exchange Board of India (SEBI) has clarified the applicability of Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 to Related Party Transactions. Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements), Regulations 2015 (‘LODR Regulations’) was amended by notification dated November 9, 2021, enhancing the scope of related parties, related party transactions (RPTs), and the materiality threshold for seeking shareholder approval, among other things.
What exactly is a Related Party?
The associated parties to Company LMN Ltd are as follows: (LMN Ltd is taken as an example for explaining purposes). Assume that Mr L, M, and N are directors of this company. In general, the company’s associated parties are as follows:
| Sl no | Related Parties | Examples |
| 1. | A director or his relative (Relative means a member of the same HUF, husband, wife, father, stepfather, mother, stepmother, son, stepson, son’s wife, daughter, daughter’s husband, brother, stepbrother, sister, step-sister) | Mr L, Mr M and Mr N are directors and the relatives of these Directors are considered as related parties. |
| 2. | Key managerial personnel or his relative | Say, Mr O is a Company secretary, his relatives will be considered related parties |
| 3. | A firm in which a director, manager, or relative is a partner | Mr L is a partner at RST. Pvt. Ltd, another firm. This firm will also be considered as a related party. |
| 4. | A private company in which a director, manager, or relative is a member or director | Mr. M is a director in M Pvt Ltd – In this case M Pvt. ltd becomes a related party. Even when Mr. M’s relative is a member or director in M Pvt ltd, this company will be considered as a related party. |
| 5. | A public company in which a director or manager is a director and holds along with his relatives more than 2% of its paid-up capital | Mr. N along with his relatives holds more than 2% of the paid-up capital of N ltd. In this case, N Ltd will be considered as a related party. |
| 6. | Any body corporate whose board of directors, MD or manager is required to act in accordance with the advice, directions or instructions of a director or manager (NA in cases when these directions are followed in a professional capacity) | When P Ltd acts on the directions of Mr. L, P Ltd will be a related party. |
| 7. | Any person on whose advice, directions or instructions a director or manager is required to act (NA when this is done in a professional capacity) | Mr A holding 51% in LMN Ltd on whose advice Mr L has to act will be considered as a related party. |
| 8. | Holding, Subsidiary or Associate of such company | These all will be considered as related parties: – ABC Ltd holding 51% in LMN Ltd (Holding Company) – LMN Ltd holding 51% in XYZ Ltd (Subsidiary Company) – DEF Ltd holding 30% in LMN Ltd (Associate Company) |
| 9. | Any company which is a subsidiary of a holding company to which it is also a subsidiary | PQR & LMN are both subsidiaries of ABC ltd. Thus, PQR also becomes a related party |
The Meaning of Related Party Transactions
Related party transactions take place with other parties with whom an entity has a close relationship. The disclosure of related party information is seen to be valuable to readers of a company’s financial statements, particularly in examining changes in its financial performance and financial situation over time and in comparison to similar information for other companies.
Regulation 23 of SEBI (LODR) Regulations 2015
SEBI modified the laws related to ‘Related Party’ and ‘Related Party Transactions’ in a notification dated November 9, 2021 to tighten the supervision of Related Party Transactions and for greater governance. Certain adjustments will take effect on April 1, 2022, and will stay in effect until April 1, 2023. However, because these modified regulations are quite complex and substantial in nature, additional guidance is required so that listed organisations have clarity when it comes to actual execution.
To dispel such misunderstandings, SEBI has issued a circular dated March 30, 2022, outlining explanations and guidelines for the seamless implementation of the modified Regulation 23 of the SEBI (LODR) Regulations, 2015, as follows:
- Listed firms will not be required to get new shareholder approval for an RPT that was authorised by the audit committee and shareholders prior to April 1, 2022.
- In accordance with Regulation 23(8), an RPT that has been approved by the audit committee prior to April 1, 2022 and that continues beyond that date and becomes material as per the revised materiality threshold* shall be presented to shareholders at the first General Meeting held after April 1, 2022.
- A RPT that has received omnibus approval from the company’s audit committee shall continue to be presented to shareholders if it is material* under the new standards.
As a result, listed entities must conduct significant research on this element of Related Party Transactions. It is necessary to ensure that all transactions requiring shareholder approval under the amended regulations are appropriately identified and presented to shareholders at the first General Meeting held after April 1, 2022, with proper and complete disclosures in the Explanatory Statement to the Notice of such General Meeting.
As a result, with the start of the new fiscal year, listed organisations must have already begun preparing for the “new normal.” All publicly traded companies, their subsidiaries, audit committee members, and independent directors must be prepared to comply with this broad area of Related Party Transactions, with strong and effective systems in place to ensure effective implementation and compliance with the spirit of the law.
SEBI expects listed firms to comply with the spirit of the legislation and to provide relevant and thorough information to allow and empower shareholders to make informed decisions.
Endnote
“The foundation of strong corporate governance is transparency, accountability, and shareholder empowerment.” Listed companies must thus guarantee compliance with the spirit of the legislation and make every effort to disclose relevant and thorough information to enable and empower shareholders to make informed decisions. The explanatory statement included in the notice sent to shareholders seeking approval for an RPT shall provide relevant information to allow shareholders to determine whether the terms and conditions of the proposed RPT are not unfavourable to the listed entity when compared to the terms and conditions of a similar transaction entered into between two unrelated parties. The information presented should include, but not be limited to, the information indicated in the circular dated November 22, 2021, in order to allow shareholders to make informed decisions,” the Board stated.
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