Monday, 23 November 2015

RELATED PARTY TRANSACTIONS

The Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulations 2015 was notified on 2nd September 2015 and will come into force from 1st December 2015. However, Regulation 31A of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 came into force on 2nd September 2015 on publication of these regulations along with sub – regulation (4) of Regulation 23. In last post here, we discussed Regulation 31A and in this post we will discuss Regulation 23.

Materiality Principal

The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions. [Regulation 23(1) of the SEBI (LODR) Regulations, 2015]

Materiality

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 ten percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity. [Explanation to Regulation 23(1)]
A transaction in a financial year if exceed ten percent of annual consolidated turnover of the listed entity will be considered as material transaction.

Approval for Related Party Transactions

All related party transactions shall require prior approval of the audit committee. [Regulation 23(2) of SEBI (LODR) Regulations, 2015]

Conditions for audit committee approval

Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions, namely-
  • the audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature;
  • the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity;
  • the omnibus approval shall specify:
    1. the name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into,
    2. the indicative base price / current contracted price and the formula for variation in the price if any; and
  • such other conditions as the audit committee may deem fit. Where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may grant omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.
  • the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given.
  • Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year. [Regulation 23(3) of SEBI (LODR) Regulation 2015]
Audit committee before approval shall satisfy itself with the criteria set by it for approval. While granting approval, audit committee shall specify terms and condition. It will review these transactions quarterly. All such omnibus approval shall be for a period not exceeding one year.

Approval for Material Related Party Transaction

All material related party transactions shall require approval of the shareholders through resolution and the related parties shall abstain from voting on such resolutions whether the entity is a related party to the particular transaction or not. [Regulation 23(4) of SEBI (LODR) Regulations 2015]
This sub – regulation has already came into force on 2nd September 2015, while all other sub – regulation of this regulation shall come into force with effect from 1st December 2015.
All related parties to the companies shall abstain from voting on a resolution considering any material related party transaction.

Exceptions

The provisions of sub-regulations (2), (3) and (4); means requirement for approvals for related party transactions shall not be applicable in the following cases:
  1. transactions entered into between two government companies;
  2. transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval. [Regulation 23(5) of the SEBI (LODR) Regulations 2015]
For the purpose of clause (a), “government company(ies)” means Government company as defined in sub-section (45) of section 2 of the Companies Act, 2013. [Explanation to Regulation 23(5)(a) of SEBI (LODR) Regulations 205]
“Government Company” means any company in which not less than fifty one percent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company. [Section 2(45) of the Companies Act, 2013]

Applicability

The provisions of this regulation shall be applicable to all prospective transactions. [Regulation 23(6) of the SEBI (LODR) Regulations 2015]
This regulation shall not apply for transaction which ceased to be continues before this date of notification coming into force.
For the purpose of this regulation, all entities falling under the definition of related parties shall abstain from voting irrespective of whether the entity is a party to the particular transaction or not. [Regulation 23(7) of the SEBI (LODR) Regulations 2015]
Similar requirement is also places in Regulation 23(4) which is charging sub – regulation for material related party transactions.
All existing material related party contracts or arrangements entered into prior to the date of notification of these regulations and which may continue beyond such date shall be placed for approval of the shareholders in the first General Meeting subsequent to notification of these regulations. [Regulation 23(8) of the SEBI (LODR) Regulations 2015]
This Regulation 23 shall be applicable to all prospective transactions. Any transaction which may continue beyond date of notification that is 2nd September 2015 shall also require shareholder approval in first general meeting subsequent to notification of these regulations. Such general meeting may be annual general meeting or extra ordinary general meeting.
This may be possible that notices for a general meeting may already issued on the date of notification of these regulation. In such case, either an addendum be issued in accordance with applicable provisions or approval may be considered in next general meeting.

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