SEBI is proposing a stricter framework for related party transactions (RPTs) conducted by companies. The new regulations state that RPTs of material subsidiaries may require approval from the audit committee if the transactions exceed 10 per cent of the subsidiary’s standalone turnover. Shareholder consent will also be necessary if these transactions cross the materiality threshold of ₹1,000 crore or 10 per cent of the listed entity’s consolidated turnover.
RPTs are transactions between related parties that involve the transfer of resources, services, or obligations, regardless of whether a price is involved. With the clarified definition provided by the regulator, transactions with a related party of the subsidiary – even if not a related party of the listed entity – will now be considered related party transactions. This means that shareholder approval will be required if materiality thresholds are breached in transactions between subsidiaries and their JV partners, potentially impacting timelines.
According to Binoy Parikh, Executive Director of Katalyst Advisors, joint venture entities in regulated sectors are likely to face increased scrutiny due to their complex inter-company dealings and capital flows.
Currently, the scope of RPT norms is limited to related parties of listed entities and does not include transactions between a subsidiary of a listed entity and a party that is not a related party of the listed entity.
In addition to RPT regulations, SEBI may also set eligibility criteria for the appointment of statutory auditors, including qualifications and experience that are suitable for the size and requirements of the listed entity. This move aims to ensure that the audit firm’s size aligns with the needs of the listed entity in terms of human resources, qualifications, and experience.
Furthermore, the proposed regulations will require disclosure of the Annual Secretarial Compliance Report as part of the annual report of listed entities. Changes or resignations of secretarial auditors may be deemed material events under listing norms. Total fees paid to auditors and changes in secretarial auditors during the financial year will also need to be disclosed.
Overall, the new regulations aim to enhance transparency and accountability in related party transactions, statutory audits, and secretarial compliance within listed entities. These measures seek to prevent potential conflicts of interest and ensure the integrity of financial reporting in the corporate sector.
