The Securities and Exchange Board of India's phased amendments to the Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, reached full effect in the first quarter of 2023, with key changes to the related party transaction (RPT) framework becoming operative from 1 April 2023. The amendments lower the threshold for identifying related parties from 20 percent to 10 percent of equity shareholding and expand the definition of transactions requiring disclosure and audit committee approval.
Background
SEBI had been progressively tightening the RPT framework since 2021, following concerns about tunnelling of funds and self-dealing in listed entities. The amendments were designed to enhance transparency in dealings between listed companies and their promoters, subsidiaries, and associated entities. The phased implementation allowed companies time to establish compliance infrastructure.
The related party transaction framework is a critical component of corporate governance in Indian capital markets. Under the earlier regime, only persons holding 20 percent or more of equity shares in a listed entity were deemed related parties for the purposes of Regulation 23 of the LODR. The lowered threshold significantly expands the universe of transactions requiring scrutiny.
Key Provisions
The principal amendments effective from April 2023 include:
Reduced shareholding threshold: Any person or entity holding 10 percent or more of equity shares in a listed entity is deemed a related party, down from the earlier 20 percent threshold. This brings a wider category of significant shareholders within the RPT compliance framework.
Expanded RPT definition: With effect from 1 April 2023, a transaction is deemed a related party transaction if its purpose and effect is to benefit a related party of the listed entity or any of its subsidiaries, regardless of whether the counterparty is itself a related party. This substance-over-form approach targets structures designed to circumvent RPT norms.
Half-yearly disclosure obligations: Listed entities must provide RPT disclosures every six months in the format specified by SEBI, timed to coincide with the publication of standalone and consolidated financial results.
Enhanced audit committee role: The audit committee's prior approval is required for all material related party transactions. The committee must assess whether the transaction is in the ordinary course of business and at arm's length.
Consolidated subsidiary coverage: The RPT framework applies to transactions by subsidiaries of listed entities, closing a previously exploited gap where RPTs were routed through unlisted subsidiaries.
Implications for Practitioners
Corporate lawyers and company secretaries must urgently update their RPT identification systems to reflect the 10 percent threshold. Many institutional investors and significant minority shareholders who were not previously classified as related parties now fall within the net, triggering compliance obligations for routine commercial dealings.
The expanded definition targeting transactions whose "purpose and effect" benefits a related party introduces a subjective element into RPT compliance. Audit committees and legal advisors will need to develop robust assessment frameworks for evaluating whether a transaction indirectly benefits a related party, even when the direct counterparty is unrelated.
For M&A practitioners, the amendments affect deal structuring where promoter groups or significant shareholders may benefit from corporate transactions. Enhanced disclosure and approval requirements add procedural steps that must be factored into transaction timelines.