Monday 29 November 2021

Related Party Transaction under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Particulars

Existing Provisions

Proposed Provisions

Key Changes/Impact 

Definition of Related Party widened:

 

“Related party” means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards:

Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party.

Provided further that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s);

It is proposed to include the following as well in the definition of related party

· All persons or entity belonging to the promoter (P) or promoter group (PG) will be regarded as related party, irrespective of its shareholding in the listed entity;

· Any person or entity holding, directly or indirectly, 20% or more of the equity shareholding in the listed entity will be regarded as a related party w.e.f. April 1, 2022;

· Any person or entity holding, directly or indirectly, 10% or more of the equity shareholding in the listed entity will be regarded as a related party w.e.f. April 1, 2023

Prior to the changes, only those persons/entities in the promoter category who owned 20 per cent or more stake were “related party.  The new regime will lead to the classification of following also as “related party”:

· All persons/entities in a promoter group (irrespective of shareholding

· Non-promoter shareholders being classified as “related party” at a later stage, as the 20% or more clause comes into effect from April 1, 2022. Further, 10 per cent or higher clause kicks in from April 1, 2023.

Transactions covered under the definition of RPT

“Related party transaction” means a transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged and a "transaction" with a related party shall be construed to include a single transaction or a group of transactions in a contract:

Provided that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s)

Now RPTs are defined as being transactions between:

ü The listed entity/its subsidiaries and a related party of the listed entity/its subsidiaries.

üThe listed entity/its subsidiaries and any person/entity, the purpose and effect of which is to benefit a related party of the listed entity/its subsidiaries.




The definition of “related party transactions” has been broadened to cover pacts beyond merely listed entities and a related party.

Regulation 23 of SEBI (LODR)- Related party transactions

(1) The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions[1] including clear threshold limits duly approved by the board of directors and such policy shall be reviewed by the board of directors at least once every three years and updated accordingly.

(1A) Notwithstanding the above, with effect from July 01, 2019, a transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed five percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

(2) All related party transactions shall require prior approval of the audit committee.

(3) 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-

(a) 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;

(b) 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;

(c) the omnibus approval shall specify

(i) the name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into;

(ii) the indicative base price / current contracted price and the formula for variation in the price if any; and

(iii) such other conditions as the audit committee may deem fit.

Provided that 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 1 crore per transaction.

(d) 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.

(e) Such omnibus approvals shall be valid for a period not exceeding 1 year and shall require fresh approvals after the expiry of 1 year.

(4) All material related party transactions shall require approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.[2]

(5) The provisions of sub-regulations (2), (3) and (4) shall not be applicable in the following cases:

(a) transactions entered into between two government companies[3];

(b) 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. 

(6) The provisions of this regulation shall be applicable to all prospective transactions.

(7) For the purpose of this regulation, all entities falling under the definition of related parties shall not vote to approve the relevant transaction irrespective of whether the entity is a party to the particular transaction or not.

Approval of the Audit committee shall be required for  :

RPTs where subsidiary is a party but listed entity is not a party subject to threshold of

10% of the consolidated turnover of the listed entity,

10%  of  the  standalone  turnover  of  the  subsidiary  w.e.f. April 1, 2023

SEBI has also proposed amending the definition of material to include RPTs that cross Rs 1,000 crore or 10% of the consolidated annual turnover, whichever is lower.

 









SEBI has proposed that RPTs, where the subsidiary is a party but the listed entity is not, will require the approval of the listed entity's audit committee only if certain size thresholds are exceeded.

Material RPTs will need the prior approval of shareholders of the listed entity if they cross Rs 1,000 crore or 10% of the consolidated annual turnover, whichever is lower. This change expands the scope of shareholder approval which earlier was needed only for transactions exceeding 10% of annual consolidated turnover.

 

 

Disclosures

The listed entity shall submit within 30 days from the date of publication of its standalone and consolidated financial results for the half year, disclosures of related party transactions on a consolidated basis, in the format specified in the relevant accounting standards for annual results to the stock exchanges and publish the same on its website.

Enhanced disclosure of information related to RPTs to be:

a) placed before the audit committee,

b) provided in the notice to shareholders for material RPTs, and

c) provided to the stock exchanges every six months in the format specified by the Board with the following timelines:

i. within 15 days from the date of publication of financials;

ii. simultaneously with the financials w.e.f. April 1, 2023

Enhanced disclosures to be placed before the audit committee, provided in the notice to shareholders for material RPTs, and provided to the stock exchanges every six months.

SEBI has proposed stricter timeline :

With effect from April 1, 2022: Within 15 days from the date of publication of standalone/consolidated financial results for the half year.

With effect from April 1,2023: Simultaneously along with the financials



[1] Explanation- 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 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

[2] Provided that the requirements specified under this sub-regulation shall not apply in respect of a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code. 2016, as amended (“Insolvency Code”), subject to the event being disclosed to the recognized stock exchanges within one day of the resolution plan being approved.

[3] Explanation-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.


This Article has been Compiled by Charu Jhamtani (Associate) 

You can direct your queries or comments to the author at charu@factumlegal.com

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.


Sunday 21 November 2021

THE RISE OF IPO

Going public is certainly a very important milestone in the life of a Company, as it happens only “once in life cycle” during corporate journey of the Company, Initial Public Offering or an IPO is a process through which a private firm makes its shares open to the public in an attempt to raise funds from investors. After bringing in an IPO, a private company becomes a publicly listed company.

Some of the advantages of going public and attaining listing include: -

Raising capital:-Companies require funds to finance its needs for expansion/growth, acquisitions & present business operations. IPO is one of the most important ways to access the capital market & raising required equity resources.

Enhancing Brand Image:- Listing a Company definitely enhances Company’s image & its profile. Listed stocks get attention of large pool of investors and other stakeholders/market participants which is helpful in creating and enhancing brand awareness. The listing compliances makes these Companies more trustworthy vis-a-vis its unlisted peers and depicts confidence of the management towards the outside community/ world.

Higher Valuations: - Companies that have their shares listed in the stock exchange have investors competing with one another to invest in them. As a result of this competition, the price of the shares is driven higher.

Various requirements for listing; -

Every Company which proposes to get its securities listed on Stock Exchange shall comply with SEBI (ICDR) Regulation, 2018 pursuant to which the Company shall obtain a due diligence certificate from the Merchant Banker which is to be submitted to SEBI where Merchant Banker shall ensure that adequate disclosure have been made to the investors and shall ensure due care and exercise independent professional judgement while exercising due diligence.

The company shall ensure that the offer document shall contain all material disclosures as specified in SEBI (IDR0 Regulation, 2018, in order to ensure that the investor takes an informed decision.

IPO IN 2021

IPO being a costly and time taking process, not much of the Company are able to come up with the IPO, however in the year 2021 there was seen a great boost in the IPO, every other Company let it be Nykaa, Paytm, Kalayan Jwellers have come up with IPO in the given year. The various reasons of spike in IPO are hereunder: -

  1. Those who bore losses are bringing up their IPOs to cover up the debts and have a successful running capital. The ones who gained profits are bringing in their IPOs so that they can expand and make their businesses bigger catering to a large audience.
  2. Because of the favorable policies by the Government more companies are going to bring in their IPOs. Also, post the lockdowns imposed by the pandemic, the government is now drafting favorable policies to support startups and companies from various sectors. This is done in an attempt to boost the country’s economy.
  3. China’s crackdown on technology companies is prompting global investors to look for new opportunities across Asia, contributing to a record jump in initial public offerings from India to South Korea that shows few signs of slowing. Tech companies from those two countries and Southeast Asia have raised $8 billion from first-time share sales this year, already blowing past the previous annual peak.
  4. The retail investor base has multiplied he onset of Covid-19 pandemic led to new investors being born. You are sitting at home, and one activity you can do, apart from your regular work, is to open a demat account and a trading account and start trading. Opening a demat account does now cost you much There is a new breed of investors in the market. The base of investable people has gone up.”
  5. The number of demat accounts grew by 50 per cent since the lockdown was imposed in March 2020. What is also evident is that investors’ have not lost money in the IPOs, barring a few – a reason that explains investors confidence in the primary market, as most of the IPO’S are oversubscribed.

Various Challenges faced while coming up with IPO 

  • Relevant costs related to the IPO and maintenance of Listed Company.
  • Increase in recurring costs and compliance costs.
  • Need to establish a structure Investor Relations
  • Need for meeting specific standards regarding disclosure of information, including material facts that may affect the pricing of the action.
  • Path of no return: close the capital of a public company is difficult and very costly.
  • Less flexibility in decision making and performance pressure.
  • Restrictions of negotiation with shareholders with privilege information.
  • Vulnerability to hostile takeover attempts.

The above given challenges can be best handled under the guidance of experts, for which mostly companies avail the services of a Practicing Company Secretary, and law firms, as an advisor to the process of IPO, considering the importance of IPO in the corporate world and the change it can bring in the life of the Company we also from past few years are providing our expertise services in the given area which includes: -

  • Overall compliance check of all applicable laws on Company, in order to ensure that the Company is eligible to come up with IPO
  • Due Diligence
  • Assisting with preparatory work to ensure that the company can meet the listing conditions
  • Secretarial support during the entire process
  • Advising on the listing process including the Listing Rules,
  • Conversion of private to public company
  • Certification of various forms to be files with ROC
  • Pre-admission restructuring
  • Vetting the secretarial portion in draft red herring prospectus
  • Review of corporate governance policies of the Company
  • Coordination for procuring the requisite approvals from the relevant ROC’s office
  • Preparing the IPO announcement.

At the conclusion, it is to be stated that making an IPO is like conducting an Orchestra where all the instruments are required to run in sync with each other to get a desired result. The preparation of offer document though is a complex process. It makes Companies to realize its own potential as well as streamline their internal operations enabling and preparing them to face new investors who will consider investment in their companies.

This Article has been Compiled by Deepika Sharma (Principal Associate) 

You can direct your queries or comments to the author at deepika@factumlegal.com

Disclaimer-

The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.