The Indian securities market regulator, the Securities and Exchange Board of India (“SEBI”), issued an administrative warning to One 97 Communications Limited (“OCL”), the parent company of Paytm Payments Bank Ltd. (“Paytm”) on July 5, 2024 in relation to certain related party transactions (“RPTs”) entered by OCL and / or its subsidiaries with Paytm. Such administrative warning was based on an examination of disclosed financial and other information related to OCL and Paytm for the financial year ended March 31, 2022.
Keeping in mind an objective of improving corporate governance standards that are followed by Indian listed companies for the healthy and robust growth of the Indian securities market, the SEBI has been continuously calibrating the disclosure requirements applicable to Indian listed companies to increase transparency and accessibility of information to investors. Provisions regulating RPTs and appropriate disclosure of such transactions are a step in that direction.
An RPT has been defined under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) as a transaction between related parties which involves transfer of resources, services or obligations between them regardless of whether a price is charged.
In the context of a listed company, a related party has been defined to generally include its promoters, directors, key managerial personnel, shareholders with specified shareholding, subsidiaries, holding companies and associate companies.
Under the SEBI LODR Regulations, if a listed company enters a transaction with its related party, such transaction will require prior approval of its audit committee. However, if a transaction is material as defined under LODR Regulations, it will also require prior approval of its shareholders.
There are exceptions to the above requirements. Therefore, it becomes necessary to examine several factors, including the following, to determine whether a transaction qualifies as an RPT:
- Identity of the parties to ascertain the intended beneficiary;
- connection of the related party with the listed company;
- period/tenure of the proposed transaction;
- cumulative value of the proposed transaction;
- other material terms of the proposed transaction; and
- consolidation of books of accounts, if a subsidiary is involved.
The SEBI through its Master Circular on LODR Regulations dated July 11, 2023 has also provided specific information that has to be placed before the audit committee and the shareholders for consideration of RPTs.
Paytm Transaction
The SEBI noted in its administrative warning that there were transactions between OCL and / or its subsidiaries and Paytm which were more than the aggregate transaction amount approved by OCL’s audit committee. The SEBI observed that the transactions that were beyond the approved amount were without due approval of either the audit committee or the shareholders of OCL. The SEBI observed that on the one hand, OCL claimed that the transactions between subsidiaries of OCL and Paytm do not qualify as RPTs and that OCL had provided a cumulative numerical value only for purposes of shareholders’ reference, on the other hand, the audit committee of OCL had considered such transactions to be material RPTs and had set a limit for the maximum amount of transactions that could have been entered into between them.
Linde India
In a matter relating to Linde India Limited (“LIL”), the SEBI has issued an Interim Order dated April 19, 2024 followed by a final order dated July 24, 2024 (“Linde India Final Order”). One of the SEBI’s conclusions in the Linde India Final Order was that LIL had failed to obtain shareholder approvals for material RPTs undertaken by it with Praxair India Private Limited (“PIPL”), a 100% step down subsidiary of LIL’s holding company.
The SEBI’s case rested on the premise that the consolidated value of the transactions between LIL and PIPL during the relevant period significantly exceeded 10% of the turnover of LIL in the previous year and hence such transactions were material RPTs requiring shareholders’ approval. LIL, on the other hand, relied upon the phrase “in a contract” in the definition of RPT to contend that for transactions to be clubbed together for purposes of the 10% threshold, such transactions should have been in pursuance of a common objective and ancillary to a single contract, i.e., they should have a nexus with each other.
However, in response to LIL’s interpretation, the SEBI observed that the provision governing material RPTs (Regulation 23(1) of LODR Regulations) unambiguously states that “transaction in question has to be taken together with previous transactions during a financial year with the same related party while considering whether it has crossed the materiality threshold” and therefore reliance on the definition of RPT to support a narrower construction is not appropriate.
In another interesting aspect of this order, LIL relied on a Guidance Note issued by the Institute of Company Secretaries of India (“ICSI”) to support its interpretation. However, the SEBI was of the view that any guidance given by the ICSI or any other authority which is at variance with the express provisions of the SEBI LODR Regulations cannot be taken into consideration.
The endeavor of Linde India to seek to go ahead with transactions that had been voted down by its shareholders based on subsequent legal opinions concluding that shareholders’ approval was not required also did not find favor with the SEBI.
Conclusion
The SEBI’s administrative warning to Paytm and its order relating to Linde India indicate that the SEBI has enhanced its scrutiny of related party transactions and related disclosures in the recent past.
One way for Indian listed companies to enhance compliance thereby also minimizing the risk of any adverse action by the SEBI is to have in place, and to strictly follow, a comprehensive policy on RPTs that suitably addresses any perceived gaps or ambiguities. Given the periodic updates to, or amendments of, the relevant regulations, it is also important that such policy be reviewed from time to time and amended for consistency with such updates or amendments.
This insight has been authored by Rajat Sethi and Abhishek Singh from S&R Associates. They can be reached at [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.