Regulatory Alert – SEBI issues clarification on Related Party Transaction
31 March 2022
The Securities and Exchange Board of India (SEBI) had amended SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 through SEBI (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021 (Amended Regulations). The Amended Regulations mainly pertain to the expansion of the definition of Related Party (RP) and Related Party Transactions (RPTs) and provide for a certain framework given the amendments. Please click here to read our detailed analysis of the Amended Regulation.
Certain onerous compliance requirements have created unintended practical challenges for companies, thereby impacting the ease of doing business in India. Hence, representations by various industrial bodies and companies were made before SEBI seeking clarifications. Recently, SEBI has issued a Circular1 containing clarification and guidance for smooth implementation of the Amended Regulations. We, at BDO in India, have analyzed and summarized the said Circular hereunder:
- Where RPT has been approved by the audit committee and shareholders prior to 1 April 2022, there shall be no requirement to seek fresh approval from the shareholders.
- For RPT approved by the audit committee prior to 1 April 2022 and it becomes material as per the revised materiality threshold, it shall be placed before the shareholders in the first General Meeting held after 1 April 2022.
- The Circular reiterates that RPT for which the audit committee has granted omnibus approval shall continue to be placed before the shareholders if it is material in terms of Regulation 23(1) of the LODR Regulations.
- It is also clarified that the explanatory statement contained in the notice sent to the shareholders for seeking approval for an RPT shall provide relevant information to enable the shareholders to take a view of whether the terms and conditions of the proposed RPT are not unfavorable to the Company, compared to the terms and conditions, had the similar transaction been entered into between two unrelated parties.
Circular emphasizes that Transparency, accountability and shareholder empowerment are the bedrock of robust corporate governance and listed entities, therefore, shall ensure to comply with the spirit of the law and endeavor to provide relevant and detailed information to enable and empower shareholders for taking an informed decision.
As the financials will draw close on 31 March 2022, there would be instances where approval for RPT would already be obtained. Clarification that such matters will not be required to have fresh approval will act as a breather to such listed companies. With this clarification, the Company will have better visibility on the compliance part.
While SEBI has provided clarification on certain compliance-related aspects, it has not provided any comments on the other aspects such as the definition of the related party, related party transactions, and threshold to determine the materiality, on which also the representations were made. Given the above, the Amended Regulations will take effect from 1 April 2022 in their current form.
1 Circular No. SEBI/HO/CFD/CMD1/CIR/P/2022/40 dated 30 March 2022