Certain key decisions with respect to regulatory framework for related party transactions (RPTs) and co-investment by investor of Alternative Investment Fund (AIF) through portfolio management route have been implemented.

A. Amendment tothe SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations)

Key changes include following:

  • Change in definition of related party | Scope expanded;
  • Amendment to the definition of 'related party transaction';
  • Revised threshold for materiality of RPT;
  • Prior approval of the audit committee for RPTs and subsequent material modifications | Expanded scope of role of the audit committee;
  • Prior shareholders' approval for RPTs and subsequent material modifications;
  • Exemption from the requirement of prior approval of the audit committee and shareholders for RPTs between two WOS;
  • Disclosure of RPTs;
  • Amended role of the audit committee.

B. Amendment to the SEBI (Alternative Investment Funds) Regulations,2012 (AIF Regulations) and SEBI (Portfolio Managers) Regulations, 2020 (Portfolio Managers Regulations):

Key changes include following:

  • Insertion of the definition of 'co-investment' and general investment conditions for co-investment;
  • Investment conditions for Category III AIFs for investment in listed equities of companies;
  • Restriction on advisory services by Manager; and
  • Changes to the Portfolio Managers Regulations

The aforesaid amendments have been analyzed below:

Changes Explanation
Change in definition of related party | Scope expanded

The definition of related party to also include:

  • All persons or entities forming part of promoter or promoter group irrespective of their shareholding;
  • 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:
    • To the extent of 20% or more;
    • To the extent of 10% or more w.e.f. April 1, 2023.

With the aforementioned change, it will become critical to understand as to which entities/persons form part of the promoter and promoter group. Earlier, any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity were deemed to be a related party, however, such threshold has been omitted. Further, even persons holding 20% or more, and 10% or more w.e.f April 1, 2023, will become important in the event they have business relationship with the listed company/its subsidiaries.

Change in definition of related party transaction (RPT)

The definition of "related party transaction" has been revised to mean a transaction involving a transfer of resources, services or obligations between:

  • A listed entity or any of its subsidiaries on one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or
  • A listed entity or any of its subsidiaries on one hand, and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries, with effect from April 1, 2023;

regardless of whether a price is charged and a "transaction" with a related party shall be construed to include a single transaction or a group of transactions in a contract.

Exclusions:

The following transactions shall not be treated as RPT:

  • The issue of specified securities on a preferential basis, subject to compliance of the requirements under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018;
  • The following corporate actions by the listed entity which are uniformly applicable/offered to all shareholders in proportion to their shareholding:
    • Payment of dividend;
    • Subdivision or consolidation of securities;
    • Issuance of securities by way of a rights issue or a bonus issue; and
    • Buy-back of securities.
  • Acceptance of fixed deposits by banks/Non-Banking Finance Companies at the terms uniformly applicable/offered to all shareholders/public, subject to disclosure of the same along with the disclosure of related party transactions every 6 months to the stock exchange(s), in the format as specified by SEBI.
Revised threshold of "materiality" for RPT A transaction with a related party will be considered material, if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds INR 1,000 crore or 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity, whichever is lower.
Prior approval of the audit committee for RPTs and subsequent material modifications | Expanded scope of role of the audit committee

Approval of the Audit committee will be required for:

  • All RPTs and subsequent material modifications. The audit committee of a listed entity will need to define "material modifications" and disclose it as part of the policy on materiality of RPTs and on dealing with RPT;
  • RPTs where subsidiary of the listed entity is a party, but listed entity is not a party, if the value of the transaction whether entered into individually or taken together with the previous transactions during the financial year, exceeds the following threshold:
    • 10% of the consolidated turnover of the listed entity as per its last audited financial statement;
    • 10% of the standalone annual turnover of the subsidiary w.e.f. April 1, 2023.

Exception: Prior approval of the audit committee of the listed entity will not be required for RPTs to which the listed subsidiary is a party, but the listed entity is not a party if Regulation 23 (Related party transactions) and Regulation 15(2) (Compliance with the corporate governance provisions) of the LODR Regulations are applicable to such listed subsidiary. Further, in case of RPTs of unlisted subsidiaries of a listed subsidiary, prior approval of the audit committee of the listed subsidiary will suffice.

Prior shareholders' approval for RPTs and subsequent material modifications

All material RPT and subsequent material modifications as defined by the audit committee, will require prior approval of the shareholders through resolution and no related party can vote to approve such resolutions whether the entity is a related party to the particular transaction or not.

Exception: Prior approval of the shareholders of a listed entity not required for a RPTs to which the listed subsidiary is a party but the listed entity is not a party if Regulation 23 (Related party transactions) and Regulation 15(2) (Compliance with the corporate governance provisions) of the LODR Regulations are applicable to such listed subsidiary. Further, for RPTs of unlisted subsidiaries of a listed subsidiary as referred above, the prior approval of the shareholders of the listed subsidiary will suffice.

Exemption from the requirement of prior approval of the audit committee and shareholders for RPTs between two WOS Another exemption has been added to this category and now prior approval of the audit committee and shareholders for RPTs will not be required for transactions entered into between two wholly-owned subsidiaries of the listed holding company, whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.
Disclosure of related party transactions

The listed entity shall submit to the stock exchanges disclosures of related party transactions in the format as specified by SEBI from time to time, and publish the same on its website, subject to the following conditions:

  • A 'high value debt listed entity' to submit such disclosures along with its standalone financial results for the half year;
  • The listed entity to make such disclosures every 6 months within 15 days from the date of publication of its standalone and consolidated financial results;
  • The listed entity to make such disclosures every 6 months on the date of publication of its standalone and consolidated financial results with effect from April 1, 2023.


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