Table of Contents
Introduction
Securities and Exchange Board of India (SEBI) has introduced Securities and Exchange Board of India (Listing Obligation and Disclosure Requirement) (Third Amendment) Regulations, 2024 (LODR) with respect to the changing corporate governance landscape and the need to align regulatory frameworks with market demands. These changes are intended to streamline procedures, lessen compliance requirements, and promote a business-friendly atmosphere. They were developed based on the suggestions of an expert committee led by Shri S.K. Mohanty.
The Changes Introduced
Regulation 2(zc) of the LODR regulations defines Related Party Transactions (RPT). 2024 amendment has revised the said regulation in order to reduce the compliance burden for the companies by exempting certain transactions which were previously deemed to be RPT. In accordance with the guidelines set forth by the Reserve Bank of India, bank deposits in current and savings accounts, including interest payments, are now exempted to be classified as RPT in addition to fixed deposits. This amendment is a step towards streamlining compliance as Reserve Bank of India prescribes for a procedure for regulating banking transactions ensuring transparency.
Additionally, directors or employees of a listed company or its subsidiary who undertake retail purchases without establishing business relationship under terms that are consistently offered to all employees and directors are also exempted. This modification underscores the necessity of distinguishing between professional and personal obligations. It establishes ease of doing business and eliminates the need to keep track of and record numerous trivial transactions. With the amendment coming into force, uniformly corporate actions whether undertaken by the listed entity or its subsidiary are now exempted to be classified as RPT.
Regulation 23 of the LODR regulations governs the compliance requirements in case of Related Party Transactions. The purpose of the amendment is to improve the framework for disclosure and approval for listed companies and their subsidiaries. The amendment eliminates the necessity for the audit committee’s approval in reimbursement and sitting fees paid by a listed company or its subsidiary to its directors, senior management, or key managerial personnel except who are part of promoter group as long as transactions is not a material transactions. This is in line with Section 188 of the Companies Act, 2013. The rationale behind such amendment is that such transactions are already under the oversight and supervision of the Nomination and Remuneration Committee and authorized by the Board of Directors, therefore there is no requirement of putting extra burden on the audit committee to analyse such transactions.
The amendment further permits the ratifications of the related party transactions to be confirmed by the audit committee at the next audit committee meeting or within three months of the transaction, whichever takes place first. The approval is subject to conditions such as transaction needs to be non-material, value of the ratified transactions within a financial year should not exceed ₹1 crore, and rationale for not requesting prior approval of the transactions, among other requirements needs to be fulfilled. Disclosures of related party transactions must be made in conjunction with the ratification details. If the transactions have not been ratified by the audit committee, it becomes voidable at the option of the audit committee. The amendment is in line with the Section 188 of the Companies Act, 2013 which prescribes for the ratification of the RPT by the Board or the shareholders as the case may be in a meeting.
The amendment has approved that the audit committee may grant omnibus approval to the related party transactions proposed to be entered into not only by the listed entity but also to its subsidiary. The provision of omnibus approval is an additional voluntary option available to the Company to get approval for recurring transactions from the Audit Committee. Hence, it is made available for all subsidiaries, irrespective of whether material or not, and can be utilized wherever RPTs of subsidiaries are required to be approved by the Audit Committee of the listed entity. The omnibus approval for subsidiary is allowed because the regulation’s intent is to cover all related party transactions that may be entered into by the listed entity or any of its subsidiaries.
Additionally, amendment has expanded the transactions which are not required to comply with the compliance procedure prescribed under Regulation 23. Now with the amendment being into effect, transactions entered into between public sector companies and transactions which are in the nature of payment of statutory dues, statutory fees or statutory charges entered into between an entity on the one hand and the Central Government or any State Government or any combination thereof on the other hand and transactions entered into between a public sector company on one hand and the Central Government or any State Government or any combination thereof on the other hand does not require the approval of the audit committee. The rationale behind such exemption that transactions between public sector companies are less likely to carry the risk of conflict of interest and undue influence. The said amendment will reduce the administrative burden of the audit committee and facilitate the smooth inter-organization transaction between public sector companies.
The Resultant Impact
The latest amendment has brought attention to the audit committee’s growing importance and critical role. Although the purpose of these amendment is to streamline procedures, they simultaneously amplified the audit committee’s duties and possible workload. On the one hand, the amendment empowered the audit committee to ratify the RPTs which recognizes that in certain circumstances, business needs may require listed entity to move forward with a transaction without obtaining prior approval of the audit committee. This adaptability can be very important in fast-paced work settings where time is of the essence.
However, at the same time to avoid abuse, the report correctly highlights that this clause should only be used in genuine or urgent circumstances. A much-needed degree of accountability and openness is added by the amendment by specifying that such ratifications must be disclosed to the stock exchange disclosures of related party transactions in the format as specified by the Board from time to time, and publish the same on its website along with a rationale for not obtaining prior approval of the committee.
Frivolous use of the ratification provision is discouraged by the public scrutiny. As a result, audit committee members now have an increased need to carefully consider the justification for every approved transaction keeping in mind the conditions as prescribed in the said regulation. This has increased the work burden of the audit committee because before the amendment, LODR regulations does not have the provision of the ratification of the RPT. Section 188 of the Companies Act, 2013 prescribes the ratification of the RPT by the Board or the shareholders as the case may be.
In order to encourage the ease of business, amendment has prescribed certain relaxation in the compliance requirements with respect to related party transactions for the listed entity as the exceptions for the transactions that will not classify as related party transactions has been widened. This is a welcome move for the listed entity as the transactions which occur in the ordinary course of business and uniform corporate actions are no longer required to follow the compliance and disclosure requirement of the RPT under LODR Regulation. The amendment in an attempt to achieve the streamline process has exempted transactions to comply with the compliance and disclosure requirement of the RPT under LODR Regulation which has been regulated by the separate authority and procedures such as sitting and remuneration fees is regulated by the Nomination and Remuneration Committee and the current and saving accounts is regulated by the Reserve Bank of India.
Conclusion
A major step towards simplifying compliance and creating a more business-friendly atmosphere for listed companies in India is the 2024 amendment to the LODR laws pertaining to Related Party Transactions. The SEBI has recognized the need to lessen needless regulatory burdens by updating the definition of RPT and exempting specific transactions, such as regular banking operations and standard employee purchases. While this move towards ease of business is welcome, it also gives audit committees more obligation to thoroughly examine and justify all authorized related party transactions, especially now that the ratification need has been added. The success of these modifications ultimately rests on a well-rounded strategy that minimizes excessive compliance requirements while fostering openness and sound governance.
This article is authored by Ms. Kritika Goyal, student at National Law Institute University, Bhopal.
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