Related Party Transactions: Companies Act and SEBI LODR Rules

Related party transactions require audit committee approval and, above specified thresholds, shareholder approval. The Companies Act and SEBI LODR apply different definitions and thresholds, and a listed entity must satisfy both. Where they diverge, LODR generally binds first in two specific ways: its materiality threshold for shareholder approval is set by reference to a percentage of consolidated turnover or an absolute rupee figure, whichever is lower, and its scope extends to transactions entered into by a subsidiary with a related party of the listed entity.

Two frameworks, different tests

The most common error is applying one framework and assuming compliance with the other. They differ in three respects.

Definition of related party. The LODR definition is broader in some respects, and has been extended to capture certain transactions where the counterparty is a related party of the listed entity or its subsidiary, even where the transaction is entered into by the subsidiary. This materially widened scope.

Thresholds for approval. Different monetary and percentage thresholds apply, with LODR materiality generally expressed as a percentage of turnover or an absolute amount, whichever is lower.

Who votes. Related parties are precluded from voting on the resolution, and the scope of that preclusion differs between the frameworks.

Approval sequence

Audit committee approval is required, and can be granted on an omnibus basis for repetitive transactions subject to conditions on the specification of the transactions and periodic review.

Where a transaction exceeds the materiality threshold, prior shareholder approval is required, with related parties abstaining.

Transactions in the ordinary course of business and at arm’s length attract relief under the Companies Act framework, but that relief does not read across to LODR in the same terms.

Disclosure

Half-yearly disclosure of related party transactions in the prescribed format, and disclosure in the annual report. The prescribed format is granular and requires details difficult to reconstruct retrospectively.

Practical points

Maintain a live related party register rather than compiling it at reporting time, and update it whenever directorships or shareholdings change.

Test every transaction against both frameworks and apply whichever imposes the higher requirement. In practice that means testing the LODR materiality threshold and the extended subsidiary scope first.

Where relying on omnibus approval, confirm the transaction actually falls within the specified scope. Omnibus approvals drafted too generally are a recurring audit finding.

Document arm’s length pricing contemporaneously — the same documentation frequently supports the transfer pricing position.

Related reading

• the LODR compliance calendar — SEBI LODR Compliance Calendar for Listed Entities
• transfer pricing documentation — Transfer Pricing Documentation for Indian Subsidiaries

Sources

• Regulation 23, SEBI LODR Regulations, 2015; Section 188, Companies Act, 2013 — sebi.gov.in and mca.gov.in