Market regulator Sebi has tightened the regulations linked to related party transactions or RPT’s in India Inc, a thorny issue for several domestic investors. The decision was taken post a board meet held on 28th September and the new regime will come into force with effect from April 1st 2022, unless specified otherwise in the fineprint.
In layman terms, a related party transaction is a transaction which takes place between two parties who hold a pre-existing connection prior to the transaction.
For starters, the definition of related party has been expanded and will now include:
a. all persons or entities forming part of promoter or promoter group irrespective of their shareholding:
b. any person/entity holding equity shares in the listed entity, as below, either directly or on a beneficial interest basis at any time during the immediately preceding financial year:
i. to the extent of 20 % or more
ii. to the extent of 10% or more w.e.f. April 1, 2023.
Importantly, the Sebi board decided that prior approval of the shareholders of the listed entity shall be required for material RPTs having a threshold of lower of Rs. 1000 crore or 10% of the consolidated annual turnover of the listed entity.
Additionally, the new regulations have put greater onus on the audit committees of companies to scrutinize RPT’s involving subsidiaries and certain thresholds have been prescribed for the same.
In a move to promote greater transparency , Sebi has also sought enhanced and timely disclosures of RPTs to audit committees , shareholders and the exchanges.
“ RPT’s have been an area of concern for investors and consequently Sebi for long. Despite Sebi putting in place regulations, there are still instances of abuse of related party transactions which escape the net by using subsidiaries. These fresh amendments are aimed at curbing this practice,” said Amit Tandon, MD of proxy advisory firm IIAS.Internet Explorer Channel Network