Related Party Transactions – ‘CA 2013’ vis-à-vis ‘SEBI LO

1. RELATEDPARTYTRANSACTIONS–‘CA2013’VIS-À-VIS‘SEBI LODR’ AUTHOR:ADV.ARVINDMANOHAR https://taxguru.in/company-law/related-party-transactions-ca-2013-vis-a-vis-sebi-lodr.html ‘RelatedParty’undertheCompaniesAct,2013(‘CA2013’)isextremelybroadandtriestoinclude relationships on account of common directors, important managerial figures, etc., serves as model definition of ‘Related Party’ to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI LODR’). The previous definition of Related Party under SEBI LODR included entities belonging to promoter or promoter groupoflistedentityandholding20%ormoreoflistedentity’sshareholding.Thissectionofdefinitionhasbeen updated with effect from April 1, 2022[1]and any individual or entity that is a promoter or promoter group of listed entity, regardless of shareholding, will now be considered as ‘Related Party’ with some deeming fiction to coverentitiesholdingequityshares:of10%ormore(effectivefromApril1,2023)inlistedentity,eitherdirectly or indirectly, at any time during the immediately preceding fiscal year, as defined in Section 89 of the CA 2013. Overall, definition of ‘Related Party’ has been significantly broadened to ensure adequate disclosure to the relevantstakeholders. RelatedPartyTransactions(‘RPTs’)underCA2013 The following transactions are covered by Section 188 of CA 2013 read with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 (‘CA Rules 2014’), which states that a company cannot enter into a contract or arrangement with a related party without prior approval of the Board or Shareholders, as the casemay be: Sale,purchase,orsupplyofanygoodsormaterials,eitherdirectlyorthroughtheappointmentofany agent–Shareholder approvalisrequired forRPTworth 10%ormoreof theCompany’sturnover. Sellingorotherwisedisposingoforpurchasingpropertyofanykind,eitherdirectlyorthroughthe appointmentofanagent–ShareholderapprovalwillberequiredforRPTworth10%ormoreofthe Company’sNet Worth. Leasingofanykindofproperty–ShareholderapprovalwillberequiredforRPTworth10%ormoreof theCompany’sturnover. Availorrenderanyservices,directlyorthroughtheappointmentofanagent–Shareholderapprovalwill berequired for RPTworth 10% or moreof the Company’sturnover. AppointmentofRelatedPartytoanyofficeorplaceofprofitintheCompany,itssubsidiaryorassociate Company–ShareholderapprovalwillberequirediftheRelatedParty’smonthlyremunerationexceeds INR2.5 Lacs. Funding/underwritingthesubscriptionoftheCompany’sanysecuritiesorderivatives–Shareholder approvalwillberequiredforRPTworth1%oftheCompany’snetworth. ApprovalsforRPTsunderCA2013

2. BoardofDirectors • Whenever a Company enters into any RPT under Section 188 of CA 2013, prior approval of the Company’s Board of Directors is required. With the caveat that a director must abstain from the meeting while it is being discussedif they haveany stake in adeal or agreement witha related party. • However, if a contract or arrangement that a director is interested in falls under the purview of Section 184(2) of CA 2013 and is not a contract or arrangement that is included in Section 188(1) of CA 2013, the director may participatein the Resolution inthe following circumstances: • IncaseofaPrivateCompany[2]orSpecificIFSCCompanyafterdisclosureofinterest. • IncaseSection8CompanywheretransactionamountdoesnotexceedINR1Lac. • Shareholders • Whenever a company enters into RPT that exceeds the above-mentioned limits, it must obtain shareholder approval via a special resolution. However, the company’s Member who is a related party may not vote in GeneralMeeting on such resolutionfor RPT approval unless: • ItisaPrivateCompany[3]andSpecifiedIFSCPublicCompany[4];or • Acompanywhere90%ormoremembersarerelativesofpromotersorarerelatedparties. • AuditCommittee • Where a company has an Audit Committee, transactions with related parties must be approved in accordance with Section 177(4)(iv) of CA 2013 and Rule 6A of CA Rules 2014. Furthermore, the Audit Committee may grant omnibus approval in the company’s interest for RPTs proposed by the company, subject to the following conditions: • AfterreceivingapprovalfromtheBoardofDirectors,theAuditCommitteewillspecifythecriteriafor makingthe omnibus approval. • Whiledefiningthecriteriaforomnibusapproval,theAuditCommitteewilltakethefollowingfactorsinto • account:– • thetransactions’repetitivenature(pastorpresent);and • the rationale for the demand for omnibus approval. Theomnibusapprovalshallcontainorindicatethefollowing:– • nameoftherelatedparties; • natureanddurationofthetransaction; • themaximumamountoftransactionthatcanbeenteredinto; • themechanismforpricevariation,ifany,aswellastheindicativebaseprice,currently contractedprice, and

3. (e)anyotherinformationastheauditcommitteemaydeemfit. The Audit Committee may grant omnibus approval for such transactions with a value not exceeding INR 1 CrorepertransactionwhenthenecessityforRPTscannotbeanticipatedandaforementionedinformation isnot available. Followingtheendoffinancialyear,anewapprovalwillbeneededasanomnibusapprovalisonlyvalid for one financial year. The Audit Committee cannot, however, give omnibus clearance for transactions involvingthe sale or disposalof company’s undertaking. ExemptionsunderCA2013 Intheeventthatatransactionisenteredintobythecompanyintheregularcourseofbusinessandon anarm’s lengthbasis, neither theboard northe shareholders willneed toapprove it. Eveniftheyexceedthelimit,transactionsbetweenaholdingcompanyanditswholly-owned subsidiarywhoseaccountsareconsolidateddonotneedshareholderapproval;instead,theholding company’sresolution will beadequate for thetransaction’s purposes. Even if it exceeds the restrictions, no shareholder approval is necessary in the case of a Government company[5]where: Contractsoragreementsithasmadewithanyothergovernmentagency,stateorcentralgovernment, ora combination of both; or Therelevantministrygivesconsentandthecompanyisanunlistedgovernmententity. RPTsunderSEBILODR “Related Party” has been defined to now encompass more than only transactions involving listed entities and subsidiaries and their related parties. This suggests that even in cases where it is not a party to RPTs of a subsidiary,listed entitywould stillneed tocomply withthe approvaland disclosureobligations. The term also includes certain categories of unrelated transactions as RPTs starting on April 1, 2023, i.e., transactionswhosegoalistobenefitrelatedpartyoflistedentityoranyofitssubsidiaries.Anytransferofassets, obligations, or services between listed entity and related party, regardless of whether a price is charged or not, is definedas RPT underRegulation 2(1)(zc) of theamended SEBI LODR. The inclusion of transactions that directly or indirectly benefit listed entity gives the concept of RPTs under amended SEBI LODR greater significance than the definition under CA 2013. This idea may be developed to counter use of intricate structures to transfer funds from listed entities to parties that appear to be unrelated but are actually intended to benefit listed entity or its related parties. As a result, since amended SEBI LODR do not include such an exception, transactions carried out in the ordinary course of business and at arm’s length that are subjectto the limits of CA2013 will now be scrutinised. ExemptionsunderSEBILODR: PreferentialissuanceofcertainsecuritiesinaccordancewiththeSEBI(IssuanceofCapitaland DisclosureRequirements) Regulations, 2018; Offers of dividends, subdividing or consolidating securities, issuing rights or bonus, or buy back of sharesmade uniformly to all shareholders;

4. (iii)AcceptanceoffixeddepositsatconsistentlyapplicabletermsbybanksandNBFCs.(iii)AcceptanceoffixeddepositsatconsistentlyapplicabletermsbybanksandNBFCs. • MaterialityofRPTs • Previously, a transaction was deemed significant during a fiscal year if it surpassed 10% of listed entity’s annual consolidated turnover as reported in its most recent audited financial statement. However, under the revised definition, RPTs would only be regarded as substantial if total value of all transactions made within a financial year,whethermadeseparatelyorincombination,exceededINR1,000Croresor10%ofthelistedentity’s annual consolidated turnover, whichever was lower. This financial threshold aims to encompass high-value corporatedeals that could nototherwise exceed the 10% level. • RoleofAuditCommittee: • TheamendedSEBILODRnecessitatespriorapprovaloftheAuditCommitteeoflistedentityfor: • AllRPTs–effectivefromApril1,2022; • SubsequentmaterialmodificationstoRPTs:TheAuditCommitteeoflistedentityneedstodefine ‘MaterialModification’and disclosethem asa partof policy– effectivefrom April1, 2022; • RPTtowhichsubsidiaryoflistedentityisaparty,butlistedentityisnotaparty: • IftheaggregatevalueofRPTismorethan10%ofannualconsolidatedturnoverinaccordance withlastaudited financialstatement oflisted entity– effectivefromApril 1,2022; and • IftheaggregatevalueofRPTismorethan10%ofannualstandaloneturnoverinaccordancewith lastaudited financialstatement oflisted entity –effective fromApril 1, 2023. • RPTsexcludedfromauditcommittee/shareholders’approval: • Between two of listed holding company’s wholly-owned subsidiaries, whose financial statements are combined with those of holding company and presented to shareholders for approval at annual general meeting. • Inadditiontotheabove,iflistedsubsidiaryissubjecttocompliancewithRegulation23andRegulation • 15(2)ofSEBILODR,theAuditCommittee’sapprovalisnotnecessarywithregardtoanRPT. Additionally, prior clearance from the Audit Committee of listed subsidiary business would be sufficient withregard to unlisted subsidiariesof listed subsidiary. • SEBIhasmadeitclearthatRPTsthathavealreadyreceivedclearancefromtheAuditCommitteeand • ShareholdersbeforeApril1,2022,willnotneedtodosoagain[6]. • RPTthathasreceivedomnibusapprovalfromtheAuditCommitteemustcontinuetobepresentedto shareholdersif it complieswith Regulations 23(1) ofSEBI LODR. • Additionally,it has been made clear that approval of the AuditCommittee is not necessary when a holding • companyentersintoatransactionwithawhollyownedsubsidiarycompany,whoseaccountsare combinedwiththatholdingcompanyandpresentedtotheshareholdersatgeneralmeetingforapproval. • Although, in first General Meeting following date of notification, on November 9, 2021[7], all material RPTs already in existence should be put up for approval by shareholders. RPTs approved by the Audit Committee before to April 1, 2022 that continue after that date and become material according to revised materiality thresholdwillalso bepresentedto theshareholdersat GeneralMeetingon thebasisof saidjustification. • ChallengesbeforeListedEntities:

5. Innearfuture,listedentitiesmightexperienceanumberofpracticaldifficultiesrelatedtostringentscrutiny,with a variety of approvals from shareholders and the Audit Committee, posing a variety of complications for many listed entities due to the linkage to company’s size in terms of turnover, which may also result in a significant increasein burden ofcompliance for listed entitieswith increased costs. The Audit Committee now has more duties since it must define “Material Modification” (a word that is not definedinamendedregulation) andexamineRPTseven whenthepartyis notlistedentitybut asubsidiary. EvenwhileSEBIhasdeemedalltransactionswiththirdpartiesthathaveintentionofbenefitingarelatedparty or that have that impact to be RPTs, there isn’t a clear definition of what this test of intention of benefit would entail. Nevertheless, it will be challenging to determine the goal and impact of any such transaction that might benefitrelated party of listedentity or any of itssubsidiaries. SecuritiesAndExchangeBoardofIndia(ListingObligationsandDisclosureRequirements)(Sixth Amendment)Regulations, 2021 ExemptionstoPrivateCompaniesU/s.462ofCA2013 Idem. ExemptiontoIFSCPubliccompanyU/s.of462ofCompaniesAct,2013 NewExemptionstoGovernmentCompanies|CompaniesAct2013 ClarificationonapplicabilityofLODRregulationtoRelatedPartyTransactions Seenote1above. Disclaimer: “The information provided in this article is for general informational purposes only. While an author tries to keep the information up-to-date and correct, there are no representations or warranties, express orimplied,aboutthecompleteness,accuracy,reliability,suitability,oravailabilityoftheinformation.Anyviews orinterpretationsdescribedinthisarticlearetheauthor’spersonalthoughtsanddonotconstitutelegalor other professional advice. You may discover there are other views or interpretations to accomplish the similar endresult.”