SEBI had constituted a Working Group in November 2019 to review the policy pertaining to related party transactions under the Chairmanship of Mr. Ramesh Srinivasan, Managing Director & CEO, Kotak Mahindra Capital Company Limited. The Working Group aims to strengthen regulatory norms in relation to related party transactions undertaken by listed entities in India.

There was an urgent need to review the regulatory framework of the related party transactions due to recent corporate frauds highlighted in relation to RPTs. The Working Group observed that one commonality in major corporate wrong doings was that they were allegedly carried out by persons with the ability to influence the decisions of the company. Shell or apparently unrelated companies, controlled directly or indirectly, by such persons were purportedly used to siphon off large sums of money through the use of certain innovative structures, thereby, circumventing the regulatory framework of RPT. The companies appear to have diluted or circumvented the requirements under their policy on RPTs by procuring approvals for continuous lending to group companies. Therefore, the Working Group through this report was requested to make recommendations on the following issues:

1. Review the policy space relating to related party transactions.
2. Review the provisions relating to related party transactions in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the Indian Accounting Standards and the Companies Act, 2013.
3. Specify a format for periodic disclosure of related party transactions by listed entities.
4. Provide recommendations for strengthening the monitoring and enforcement of regulatory norms related to related party transactions.

Major Recommendations

1. The Working Group deliberated on the definition of related party transactions as per the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the Indian Accounting Standards and the Companies Act, 2013. After detailed deliberation on the definition, the Working Group recommended that “all persons or entities belonging to the ‘promoter’ or ‘promoter group irrespective of their shareholding in the listed entity, should be deemed to be related parties”.


2. The Working Group deliberated on the threshold for determining shareholding in which a person not forming part of the promoter/promoter group would get classified as a related party. The Working Group recommended that “any person or any entity, directly or indirectly (including with their relatives), holding 20 percent or more of the holding in the listed entity should also be considered as a related party”.


3. The Working Group also examined the definition of RPTs from the perspective of strengthening it and recommended broadening the definition of RPTs to include transactions that are undertaken, whether directly or indirectly, to benefit related parties. 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. The Working Group recommended that transaction between the listed entity or its subsidiaries and any other entity which is aimed to benefit a related party should be considered as an RPT. Separately, the Working Group also recommended excluding certain corporate actions such as payment of dividend, sub-division or consolidation of securities, buy-back, rights, preferential allotment, and bonus issue of securities.


4. The Working Group determined that the related party transactions relating to subsidiaries of the listed entity should require prior approval of the audit committee subject to their value exceeding 10% of the total revenues, total assets or net worth of the subsidiary, on a stand alone basis, for the immediately preceding financial year, whichever is lower. Provided that the criterion relating to net worth shall not be applicable if the net worth of the subsidiary is negative. Further, it was also decided that at this stage, associate companies and joint ventures need not be included under such additional prior approval requirements. Further, companies can specify a lower materiality threshold as per their RPT policies. In addition,the Working Group also recommended that the materiality threshold in Regulation 23(1) may be amended to 5% of the annual total revenue, total assets, or net worth of the listed entity on a consolidated basis or Rs. 1000 crore, whichever is lower.


5. The Working Group further 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. Subsequent the working group also suggested that material modifications of RPTs also require prior audit committee approval and, if applicable, shareholders' nod. The audit committee needs to be aware of the value of a proposed RPT as a proportion of the annual total revenues, total assets, and net worth. 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 counterparty and of the same type may be aggregated.Further, the justification for each transaction must be provided, unless there are a series of transactions interdependent on each other, in which case the justification for the entire series needs to be furnished.


6. The Working group also suggested improvements in disclosure requirements, monitoring in use of structured data to augment enforcement, and the use of standardized identifiers to identify RPTs.