sebi

Update on Amendments in provisions for Related Parties Transactions (RPTs) (Listing Regulations)

Introduction

In an effort to enhance corporate transparency and strengthen governance, the Securities and Exchange Board of India (SEBI) has revised the Listing Obligations and Disclosure Requirements (LODR) concerning Related Party Transactions (RPTs). These amendments introduce new definitions, approval requirements, materiality thresholds, and disclosure mandates. This article outlines the major regulatory updates applicable from April 1, 2022, April 1, 2023, and July 1, 2025.

Definition of Related Parties and Related Party Transactions

Expanded Criteria:

  • Any person or entity forming part of the promoter or promoter group of the listed entity is now classified as a related party, regardless of their shareholding (earlier, a 20% holding threshold applied).

  • Any person or entity holding equity shares, either directly or beneficially as per Section 89 of the Companies Act, during the previous financial year is a related party if:

    • Shareholding is 20% or more (effective from April 1, 2022)
    • Shareholding is 10% or more (effective from April 1, 2023)

  • Any transaction involving listed entities and their subsidiaries or any third party, undertaken for the benefit of the listed entity or its subsidiaries, falls within the scope of RPTs.

Audit Committee Approval Process

Prior Approval Requirements:

  • All RPTs and their material modifications must receive prior approval from the Audit Committee (AC).
  • The AC must define what constitutes "material modifications" within the entity's policy on materiality of RPTs (effective April 1, 2022).

Subsidiary Involvement:

  • If an RPT involves a subsidiary of a listed entity, prior approval is required when:
    • The transaction exceeds 10% of the annual consolidated turnover of the listed entity (effective April 1, 2022), or
    • The transaction exceeds 10% of the annual standalone turnover of the subsidiary (effective April 1, 2023)

Additional Disclosures:

  • SEBI mandates that specific additional information be presented to the AC prior to approval of any proposed RPT.

Materiality Thresholds and Shareholders’ Approval

Mandatory Approvals:

  • All material RPTs and their subsequent material modifications must be approved by the shareholders of the listed entity (effective April 1, 2022).

Thresholds for Materiality:

  • A transaction is considered material if it exceeds:

    • INR 1,000 Crore, or
    • 10% of the annual consolidated turnover of the listed entity, whichever is lower (effective April 1, 2022).

  • For SME-listed entities, an RPT is considered material if it exceeds:

    • INR 50 Crore, or
    • 10% of annual consolidated turnover, whichever is lower (effective April 1, 2025).

  • For unlisted subsidiaries without financial records (e.g., no audited financials), materiality can be assessed based on 10% of standalone net worth, certified by a practicing chartered accountant within three months of seeking approval.

Shareholder Notice Requirements:

  • Notices for shareholder approval must include:
    • Complete transaction terms
    • Rationale for the transaction
    • Pricing mechanisms
    • Additional prescribed disclosures to ensure transparency

Exemptions from Audit Committee and Shareholders’ Approval

Existing Exemptions:

  • Transactions between:
    1. Two government companies
    2. A holding company and its wholly-owned subsidiary

New Exemption:

  • Exemptions now extend to transactions between two wholly-owned subsidiaries of a listed holding company, provided:
    • Their financials are consolidated with the holding company
    • The consolidated accounts are presented to shareholders at the general meeting

Enhanced RPT Disclosures to Stock Exchanges

Key Requirements:

Listed entities must provide comprehensive RPT disclosures to the Audit Committee, shareholders, and stock exchanges, including:

  • Details of the Related Party:

    • Name
    • Relationship with the listed entity
    • Ownership structure
    • Financial performance
    • History of previous transactions

  • Transaction-Specific Details:

    • Nature, value, and terms of the proposed transaction
    • Justification and benefits for the listed entity

  • Valuation Reports:

    • Independent valuations are required for specific transactions to ensure fair pricing

  • Peer Comparisons:

    • Required for royalty payments and similar transactions to justify pricing based on industry benchmarks

Disclosure Format and Timelines:

  • RPT disclosures must be submitted every six months using the SEBI-prescribed format.

  • Revised deadlines:

    • Initially effective April 1, 2025
    • Extended to July 1, 2025 for full compliance

  • SEBI has introduced a seven-category disclosure structure covering both balance sheet and profit-and-loss items to ensure consistency across all listed entities.

Conclusion

SEBI’s amendments to the RPT framework significantly enhance transparency and accountability in listed entities. Companies must align their internal processes and disclosure mechanisms with the updated requirements to remain compliant. Regular monitoring of SEBI circulars and timely updates to governance policies are essential for effective implementation and stakeholder trust.