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Part 4 of 5

Related Party Transactions

Master the complex framework of Related Party Transactions under LODR - from expanded definitions and material thresholds to audit committee and shareholder approval requirements and mandatory RPT policy.

Time: ~90 minutes Sections: 5 Tables: 3 Quiz: 10 Questions

4.1 Definition of Related Party

Understanding who constitutes a "related party" is fundamental to RPT compliance. LODR expands the definition beyond Companies Act 2013 to capture a wider net of relationships that could lead to conflicts of interest.

LODR Definition (Regulation 2(1)(zb))

Related party under LODR includes:

2(1)(zb) - Related Party
Related party shall have the meaning as defined under Section 2(76) of the Companies Act, 2013 or under applicable accounting standards, AND shall include any person or entity belonging to the promoter or promoter group and holding 20% or more shareholding.

Categories of Related Parties

CategoryExamplesSource
Directors and KMPDirectors, CEO, CFO, CS, WTDCompanies Act 2013
Relatives of Directors/KMPSpouse, parent, sibling, child, spouse's parentCompanies Act 2013
Holding/Subsidiary CompaniesParent company, subsidiary, fellow subsidiaryCompanies Act 2013
Associates and Joint VenturesSignificant influence entitiesInd AS 24
Promoter Group EntitiesCompanies where promoter holds 20%+ stakeLODR specific
Person with ControlAny person having control over listed entityLODR specific
!Critical 2023 Amendment

The 2023 amendments expanded the definition to include any person or entity belonging to the promoter or promoter group. This significantly widens the net of RPT compliance, capturing transactions with promoter-related entities that were previously outside LODR scope.

Practical Identification Challenges

  • Step-down Subsidiaries: All levels of subsidiaries, not just immediate
  • Common Directorships: Where a director sits on both boards
  • Trusts and HUFs: Where promoters are beneficiaries/karta
  • Indirect Holdings: Holdings through multiple layers
PPractitioner Focus

Maintain a comprehensive related party database updated quarterly. Cross-reference with: (1) MCA filings of group companies, (2) Promoter group declarations, (3) Director disclosures under MBP-1, (4) Shareholding pattern filings.

4.2 Material RPT Threshold

Material Related Party Transactions require shareholder approval. Understanding the threshold is crucial as it determines the level of approval required and disclosure obligations.

Material RPT Definition (Regulation 23(1))

23(1) - Material RPT Threshold (Amended 2023)
A transaction with a related party shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year exceeds the lower of: (a) 10% of annual consolidated turnover, or (b) Rs. 1000 crore.

Evolution of Threshold

PeriodThreshold
2015-201910% of annual turnover only
2019-202210% of annual consolidated turnover
2023 onwardsLower of 10% of annual consolidated turnover OR Rs. 1000 crore
KKey Change

The Rs. 1000 crore absolute cap was introduced to ensure that large companies cannot escape shareholder approval by virtue of their size. A company with Rs. 50,000 crore turnover previously needed only Rs. 5000 crore threshold; now capped at Rs. 1000 crore.

Calculation Principles

  • Aggregation: All transactions with same related party during financial year are aggregated
  • Annual Turnover: Based on audited consolidated turnover of preceding financial year
  • New Companies: Projected turnover may be used for newly listed entities
  • Both Legs: Purchase and sale with same party are separate transactions

Transactions Exempt from Materiality Test

Certain transactions require shareholder approval regardless of value:

  • Sale, disposal, or leasing of assets exceeding 20% of assets
  • Sale or disposal of wholly owned subsidiary
  • Acquisition involving related party consideration

4.3 Audit Committee Approval

The Audit Committee plays a gatekeeping role for all related party transactions. Regulation 23(2) and (3) prescribe the approval process that must be followed before any RPT is entered into.

Prior Approval Requirement

As per Regulation 23(2) and (3), Audit Committee approval is required:

  • All RPTs: Every related party transaction requires prior approval
  • Prior Approval: Approval must be obtained BEFORE transaction is entered into
  • Arm's Length: Committee must satisfy that transaction is at arm's length
  • Ordinary Course: Committee must verify if transaction is in ordinary course of business
!Post-Facto Approval Eliminated

2023 amendments eliminated the provision for post-facto approval. Earlier, transactions up to Rs. 1 crore could be approved subsequently. Now, ALL RPTs require PRIOR approval. Omnibus approval for recurring transactions is the only alternative.

Omnibus Approval Framework

For recurring transactions, Audit Committee may grant omnibus approval:

  1. Valid for One Year: Omnibus approval valid for one financial year only
  2. Renewal Required: Fresh approval required at start of each financial year
  3. Criteria to Specify: Name of related party, nature, period, maximum amount, indicative base price
  4. Rationale: Committee must record justification for omnibus approval
  5. Review: Quarterly review by Audit Committee of all omnibus transactions

Audit Committee Review Requirements

Review AspectFrequency
Omnibus approvals - utilization reviewEvery quarter
All RPTs during the quarterEvery quarter
Arm's length basis verificationFor each transaction
RPT Policy complianceAnnually
TPractice Tip

Maintain RPT register with: (1) Date of committee approval, (2) Specific terms approved, (3) Actual transaction values, (4) Variance from approved terms, (5) Justification for any deviation. This documentation is essential for secretarial audit and SEBI inspections.

4.4 Shareholder Approval Requirements

Material RPTs require shareholder approval through ordinary resolution. This approval adds a layer of protection for minority shareholders against transactions that could benefit related parties at the company's expense.

When Shareholder Approval is Required

  • Material RPT: Transaction exceeding material threshold requires shareholder approval
  • Prior Approval: Must be obtained before entering into the transaction
  • Resolution Type: Ordinary resolution (simple majority)
  • Voting Mechanism: Through postal ballot or e-voting recommended

Voting Restrictions (Regulation 23(4))

KRelated Party Voting Exclusion

Related parties, whether directly or indirectly interested in the transaction, shall not vote on resolution for approval of that RPT. All entities forming part of promoter/promoter group shall abstain from voting on RPT resolutions where promoter group entity is a party.

Exemptions from Shareholder Approval

Following transactions are exempt from shareholder approval requirement:

  • Wholly Owned Subsidiary: Transactions between listed entity and its wholly owned subsidiary
  • WOS to WOS: Transactions between two wholly owned subsidiaries of listed entity
  • Preferential Issue: Issue and allotment of securities under SEBI ICDR Regulations

Explanatory Statement Requirements

Notice for shareholder meeting must include detailed explanatory statement:

  • Summary of information provided to Audit Committee
  • Justification for why the transaction is in company's interest
  • Nature of transaction and material terms
  • Name of related party and relationship
  • Any other information relevant to shareholders' decision

4.5 RPT Policy Requirements

Listed entities must formulate a comprehensive RPT Policy approved by the Board. This policy provides the framework for identifying, approving, and monitoring related party transactions.

Mandatory Policy Components

  1. Identification: Procedure to identify related parties and related party transactions
  2. Materiality: Clear definition of material modification requiring fresh approval
  3. Approval Process: Detailed approval workflow including authority matrix
  4. Arm's Length: Mechanism to determine arm's length pricing
  5. Ordinary Course: Criteria to determine if transaction is in ordinary course
  6. Review: Periodic review mechanism by Audit Committee
  7. Disclosure: Disclosure and transparency requirements

Website Disclosure

Regulation 46 mandates disclosure of RPT Policy on company website:

  • Website: Must be disclosed on company website
  • Location: Under "Investor Relations" or "Corporate Governance" section
  • Update: Any amendment must be updated within 2 working days
  • Archive: Previous versions should be maintained for reference

Annual Report Disclosures

DisclosureRequirement
Policy on RPTWeb-link to policy in annual report
Material RPT DetailsDetails of all material RPTs entered during year
Form AOC-2Particulars of contracts/arrangements with related parties
RationaleJustification for entering into material RPTs
"Related party transactions, if not properly monitored and controlled, can result in conflict of interest and may be detrimental to the interest of minority shareholders."SEBI Discussion Paper on RPT Framework
PBest Practice

Include in RPT Policy: (1) Independent valuation thresholds, (2) Escalation matrix for exceptional transactions, (3) Conflict of interest declaration format, (4) Templates for Audit Committee presentation, (5) Quarterly reporting format to Board.

Key Takeaways

  • Related party definition under LODR is wider than Companies Act - includes promoter group entities
  • Material RPT threshold: Lower of 10% turnover or Rs. 1000 crore
  • All RPTs require prior Audit Committee approval - no post-facto approval allowed
  • Related parties must abstain from voting on RPT resolutions
  • WOS transactions are exempt from shareholder approval
  • RPT Policy mandatory with website disclosure