I. Background

Even since the introduction of Companies Act, 2013 in the year 2014 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), corporate governance and Related Party Transactions (RPTs) has been an area of focus for the regulators, more so in light of recent corporate scams.
While Companies Act provides the much-needed flexibility to undertake related party transactions which are on arms-length basis and in ordinary course of business of a company, LODR has had more stringent compliance requirements along with several amendments from time to time, including coverage of ‘related party’ and ‘related party transactions’, disclosure requirements and approval requirements.
Recently, SEBI had in its Board meeting held on September 28, 2021 reviewed regulatory provisions with respect to RPTs and approved changes to LODR Regulations that were proposed by the Working Group (‘WG’) in its Report dated January 27, 2020. Thereafter on November 9, 2021 it notified Securities And Exchange Board Of India (Listing Obligations And Disclosure Requirements) (Sixth Amendment) Regulations, 2021 (“Amendment Regulations”) with changes proposed to be effective from April 1, 2022. Now, on November 22, 2021 SEBI has vide a Circular prescribed the information to be placed before the audit committee and the shareholders for consideration of RPTs and the format of half yearly disclosure as well.
II. Changes in the Definitions
A. Related Party
a. Inclusion of “Promoter”
While LODR so far relied mainly on the definition of Related Party under section 2(76) of Companies Act, 2013 and para 9 of Indian Accounting Standard 24 – Related Party Disclosures for coverage of Related Parties for LODR purpose, Promoter or Promoter Group is included in neither. SEBI had wef April, 2019 plugged this vital loophole for listed companies, by including ‘any person/entity belonging to the promoter/ promoter group and holding 20% or more shareholding’ within the definition of “related party”. Now, the new provisions shall cover person/entity belonging to the promoter/ promoter group without the requirement of holding any threshold of shareholding.
b. Inclusion of any person equity shares in the company (even on beneficial basis)
The definition of “related party” has been further amended to include any person or entity holding equity shares ither directly or on a beneficial interest basis as provided under section 89 of the Companies Act, 2013, at any time, during the immediate preceding financial year amounting to:

– 20% or more (w.e.f. April 1, 2022)
– 10% or more (w.e.f. April 1, 2023)
B. Related Party Transaction
a. Inclusion of Related Parties of Subsidiaries and Transactions of Subsidiaries
The new definition of RPT shall cover a transaction between (i) the listed entity or any of its subsidiaries on one hand and (ii) a related party of the listed entity or any of its subsidiaries on the other hand. This will require appropriate identification of related parties, tracking transactions with such parties and approval of / disclosure to Audit Committee and shareholders and stock exchanges under relevant regulations.
b. Transaction undertaken to benefit a related party
A transaction by listed entity or its subsidiary with unrelated party shall also get covered with effect from April 1, 2023, if the purpose and effect of such transaction is to benefit a related party of the listed entity or any of its subsidiaries. The intention here is to consider substance of the relationship and not merely legal form as a part of good governance practice. While this provision has been borrowed from the UK Premium Listing Rules, SEBI has not provided any guidance on identifying such transactions. Based on the comments received from public and Primary Market Advisory Committee (PMAC) on the practical difficulties of implementing this provision, SEBI has made this provision effective from April 1, 2023 only providing some time for the Industry.
c. Exclusion of certain corporate actions
(i) Preferential allotment, being subject to procedures specifically laid down by SEBI in other regulations, and (ii) certain transactions which, by their very nature treat all shareholders equally such as payment of dividend, subdivision or consolidation of securities, bonus or rights issue, buy-back of securities have been excluded from the purview of RPTs. This is a welcome move as there were divergent views among the listed entities on inclusion of such transactions.
However, the exclusion does not specifically cover dividend received by the listed entity and hence it may still need prior audit committee approval and shareholders’ approval (if above materiality threshold).
III. Audit Committee Approval / Reporting
A. Approval of transactions undertaken at subsidiary level
The new provisions mandate approval of Audit Committee of Listed Entity of transactions of its Subsidiaries with Related Parties (other than transaction with listed entity) if the value of such transaction (whether entered individually or taken together with previous transactions) during a financial year exceeds:
– 10% of the annual consolidated turnover of the listed entity, as per the last audited financial statements (w.e.f. April 1, 2022)
– 10% of the annual standalone turnover of the subsidiary, as per the last audited financial statements (w.e.f. April 1, 2023).
Accordingly, transaction of subsidiaries (including foreign subsidiaries) with related parties above the specified threshold limits cannot go through unless it receives prior approval of the Audit Committee of the listed entity. This may result in a conflict situation as below:
a. Audit Committee of an Indian listed entity having veto power over transactions entered into by foreign company; and
b. Foreign subsidiary being in favour of entering into a transaction with a related party, but the transaction may not receive the approval of the Audit Committee of the Indian listed entity.
However, it shall be noted that transactions between two wholly owned subsidiaries shall not require prior approval by either audit committee approval of listed entity or shareholders members approval.
B. Approval of “Material Modifications”
The Audit Committee under the new provisions has an obligation to grant prior approval for “material modifications” of an RPT. However, the amendments do not provide the definition of “material modification” and instead states that the Audit Committee shall define “material modifications” and disclose it in the RPT Policy of the listed entity.
C. Enhanced disclosure for prior approval for RPTs
The amendments mandate following information to be provided to Audit Committee for seeking its approval for proposed RPTs:

a. Type, material terms and particulars of the proposed transaction;
b. Name of the related party and its relationship with the listed entity or its subsidiary, including nature of its concern or interest (financial or otherwise);
c. Tenure of the proposed transaction (particular tenure shall be specified);
d. Value of the proposed transaction;
e. The percentage of the listed entity’s annual consolidated turnover, for the immediately preceding financial year, that is represented by the value of the proposed transaction (and for a RPT involving a subsidiary, such percentage calculated on the basis of the subsidiary’s annual turnover on a standalone basis shall be additionally provided);
f. If the transaction relates to any loans, inter-corporate deposits, advances, or investments made or given by the listed entity or its subsidiary:
i. details of the source of funds in connection with the proposed transaction;
ii. where any financial indebtedness is incurred to make or give loans, intercorporate deposits, advances, or investments,
1. nature of indebtedness;
2. cost of funds; and
3. tenure;
iii. applicable terms, including covenants, tenure, interest rate and repayment schedule, whether secured or unsecured; if secured, the nature of security; and
iv. the purpose for which the funds will be utilized by the ultimate beneficiary of such funds pursuant to the RPT.
g. Justification as to why the RPT is in the interest of the listed entity;
h. A copy of the valuation or other external party report, if any such report has been relied upon;
i. Percentage of the counter-party’s annual consolidated turnover that is represented by the value of the proposed RPT on a voluntary basis;
j. Any other information that may be relevant
The audit committee shall also review the status of long-term (more than one year) or recurring RPTs on an annual basis.
IV. Approval of Members
A. Materiality Threshold
SEBI has revised the materiality threshold for obtaining shareholder approval, to cover transactions that exceed INR 1,000 Cr or 10% of the annual consolidated turnover, whichever is lower. INR 1,000 Crore threshold may bring many more transactions within the ambit of shareholder approval as against only the 10% annual consolidated turnover criteria earlier.
Further, all material transactions and subsequent material modifications (as defined by the audit committee) will require prior approval of shareholders. No exception is provided for transactions undertaken at arm’s length and in ordinary course like in case of Companies Act.
B. Reasoned disclosure in the explanatory statement
The amendments mandate following additional information to be provided as a part of the explanatory statement:
a. A summary of the information provided by the management of the listed entity to the audit committee as specified under point III C above;
b. Justification for why the proposed transaction is in the interest of the listed entity;
c. Where the transaction relates to any loans, inter-corporate deposits, advances or investments made or given by the listed entity or its subsidiary, the details specified under point III C (f) above; (The requirement of disclosing source of funds and cost of funds shall not be applicable to listed banks/NBFCs.)
d. A statement that the valuation or other external report, if any, relied upon by the listed entity in relation to the proposed transaction will be made available through the registered email address of the shareholders;
e. Percentage of the counter-party’s annual consolidated turnover that is represented by the value of the proposed RPT, on a voluntary basis;
f. Any other information that may be relevant.
V. Disclosure to Stock Exchanges
A. The amendments mandate RPT disclosure to the stock exchanges as per stricter timelines mentioned below:
High Value Debt Listed Entity – Simultaneously along with the financials for half year
Listed Entity –

– Within 15 days from the date of publication of standalone / consolidated financial results for the half year (w.e.f. April 1, 2022).

– Simultaneously along with the financials (w.e.f. April 1, 2023).
B. Format for the disclosure covers following information:
Earlier regulations provided for disclosure to be made in the format specified in the relevant accounting standards for annual results. Thereafter, in September 2021 stock exchanges, in consultation with SEBI, introduced a facility of filing of RPTs in XBRL mode in prescribed format. Now under the new amendments SEBI has itself prescribed the format and the information to be provided. It mandates party-wise, transaction type-wise information to be provided. It also requires opening and closing balances, including commitments, to be disclosed for existing related party transactions even if there is no new related party transaction during the reporting period. SEBI also requires certain additional information to be provided in case of loans, inter-corporate deposits, advances or investments made or given by the listed entity/subsidiary.
VI. Conclusion
The amendments bring in a sea-change in regulatory framework for RPTs in case of listed entities which requires the entities to step-up their internal processes from identification of related parties to prior approval of proposed transactions by audit committee and shareholders, tracking material modifications to finally reporting the transactions to the audit committee and the stock exchanges (and on its website).
The amendments also put additional requirements on the Audit Committee to scrutinize transactions of subsidiaries including foreign subsidiaries in various jurisdictions. In addition to this, from January 1, 2022, only the independent directors of the Audit Committee can approve RPTs .