Securities and Exchange Board of India (“SEBI”) has recently introduced significant changes in the regime governing related parties transactions (“RPT”) vis-à-vis listed entities provided under the SEBI (Listing Obligations and Disclosure Requirements), 2015 (“Listing Regulations”). Most prominent changes include revision of the definition of ‘related party', the transaction falling within the ambit ‘related party transactions' and amendment in the materiality thresholds.
The definition of the term ‘related party' has been widened to include (i) all the entities forming part of the promoter and promoter group notwithstanding whether or not they hold any shares in the listed entity as well as (ii) any shareholder holding more than 20 percent in the shareholding of the listed entity whether directly or indirectly i.e. large shareholders. Owing to aforesaid revision in the definition of ‘related party', the large shareholders including private equity, financial investors along with their portfolio companies will now be deemed to be related party to a listed entity, further, the restriction in relation to voting on resolution pertaining to RPT will also apply to such large shareholders.
The definition of RPT has also been enlarged to not only include all the transactions undertaken by a subsidiary of a listed entity (except wholly owned subsidiary) with the related parties of such listed entity but also with the related parties of such subsidiary. Pursuant to this amendment, all the transactions undertaken by subsidiaries of listed entities (including such subsidiaries which are in the nature of joint ventures) with the joint venture partner (“JV Partner”) of the listed entity will be considered as RPTs.
Interestingly, in most of the cases JV Partner is not considered as a related party of the listed entity and if any transaction is done directly by the listed entity with such JV Partner, the same will not be considered as a RPT. On the contrary, if the same JV partner enters into transaction with the subsidiary of listed entity, it will be treated as a RPT, and voting restrictions under Listing Regulations will apply and all the related parties will not be entitled to vote for approving such RPT.
Generally, the joint venture companies are formed with the specific intent to pool in respective expertise of the JV partner to inter-alia avail technological or other support, and usually as part of the JV agreements long term agreements are agreed and executed to reap the benefits by the joint ventures. While the Companies Act, 2013 provides for an exemption in relation to RPT undertaken in the ordinary course of business and at arm's length basis, there is no such exemption under the Listing Regulations. Therefore, it makes out a case, wherein SEBI may consider granting exemptions to certain bonafide RPTs including RPTs undertaken by subsidiaries which are in the nature of joint ventures.
While the intent of the aforesaid amendments is to seek minority approval in relation to RPTs of the subsidiaries also thereby enlarging the scope of governance, however, the commercial wisdom, domain expertise and business interests may get severely affected thereby eroding value of the listed entity and the subsidiary company involved, if any such RPT resolution gets defeated by the minority shareholders for any reason.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
