Sebi panel proposes sweeping changes to norms governing related party transactions

New Delhi: A Sebi-appointed panel has proposed sweeping changes to strengthen the monitoring and enforcement of norms pertaining to related party transactions.

Tweaking the definition of Related Party and Related Party Transactions (RPTs) and revising thresholds for classification of such transactions as material, are among the recommendations.

Also, the committee has proposed changes to the process followed by a company's audit committee for approval of RPTs that are material. Further, a format for reporting of RPTs to the stock exchanges has been mooted.

In November 2019, the markets watchdog constituted a Working Group to review the policy space pertaining to RPTs under the chairmanship of Ramesh Srinivasan, Managing Director and CEO of Kotak Mahindra Capital Company.

On January 22, the group submitted its 61-page report to the regulator.

Public comments have been sought on the committee's recommendations by February 27.

Under the proposal, related party should be any person or entity belonging to the promoter or promoter group of the listed entity.

Besides, any person or any entity, directly or indirectly (including with their relatives), holding 20 per cent or more of the holding in the listed entity should also be considered as related party.

The panel recommended that prior approval of the audit committee of the listed entity should be mandatory for transactions carried out between the listed entity or any of its subsidiaries with a related party.

The materiality threshold should be amended to 5 per cent of the annual total revenues, total assets or net worth of the listed entity on a consolidated basis or Rs 1,000 crore, whichever is lower.

It further said the net worth criterion should not apply to companies with negative networth. Further, companies can specify a lower materiality threshold as per their RPT policies.

Generally, RPT means a transaction involving a transfer of resources, services between the listed entity or its subsidiaries on the one hand and a related party of the listed entity or its subsidiaries on the other hand.

Also, transaction between listed entity or its subsidiaries and any other entity which is aimed to benefit a related party should be considered as a RPT.

According to the panel, the issue of securities on a preferential basis and corporate actions by the listed entity which are uniformly applicable to all shareholders in proportion to their shareholding such as payment of dividend, and rights issue should not be treated as RPTs.

"Related Party Transactions relating to subsidiaries of the listed entity should require prior approval of the audit committee subject to their value exceeding 10 per cent of the total revenues, total assets or net worth of the subsidiary, on a standalone basis, for the immediately preceding financial year, whichever is lower," the committee said.

This would be subject to the condition that criteria related to networth would not be applicable if the networth of the subsidiary is negative.

Further, it has been suggested that associate companies and joint ventures need not be included under such additional prior approval requirements, it added.

Subsequent material modifications of RPTs require prior audit committee approval and, if applicable, shareholders' nod.

Each type of RPT with a single party should be disclosed separately and there should be no clubbing or netting of transactions of the same type. However, RPTs with the same counter party and of the same type may be aggregated.

The audit panel need to be aware of the value of a proposed RPT as a proportion of the annual total revenues, total assets and net worth of the consolidated entity, as per the panel.

Further, justification for each individual transaction must be provided, unless there are a series of transactions interdependent on each other, in which case the justification for the entire series need to be furnished.

The panel also suggested improvements in monitoring and enforcements in three main areas, including use of structured data to augment enforcement, and use of standardised identifiers to identify RPTs.