The Securities and Exchange Commission of India (SEBI), the market regulator, has carried out a thorough reform to strengthen the supervision and enforcement of related-party transactions.
According to the notice, the regulator has adjusted the definition of “related party” and “related party transaction” (RPT).
It made changes to the process followed by the company’s audit committee to approve important RPTs.
In addition, there will be a format for reporting RPT to the stock exchange. The recent rulings of Zee, Dish TV, and NCLT in the Videocon case may trigger changes in the RPT framework.
Generally speaking, RPT refers to a transaction involving the transfer of resources and services between the listed entity or its subsidiary and the related parties of the listed entity or its subsidiary.
The recent rulings of Zee, Dish TV, and NCLT in the Videocon case may trigger changes in the RPT framework.
Experts believe that any transaction that benefits related parties (or even indirectly) needs to be approved by the audit committee of the listed company and shareholders.
When a transaction is conducted with a third party but may benefit related parties, it will be difficult to identify and sometimes lead to unnecessary allegations of violations against the company.
According to the new regulations, SEBI stated that the related party will be any individual or entity belonging to the promoter or promoter group of the listed entity.
In addition, any individual or any entity that directly or indirectly (including with their relatives) held 20% or more of the shares of the listed entity in the previous financial year, effective from April 1, 2023, will be regarded as a related party.
For major RPTs with a threshold of less than Rs 1,000 crore or 10% of the combined annual turnover of the listed entity, the prior approval of the listed entity’s shareholders will be required.
SEBI stated that all subsequent major changes to the RPT and audit committee definitions require the approval of the audit committee.
In addition, if the subsidiary is a party but the listed entity is not, the RPT will require approval.
From April 1, 2023, the threshold is 10% of the consolidated turnover of the listed entity and 10% of the independent turnover of the subsidiary.