The Securities and Exchange Board of India (SEBI) issued a warning to One 97 Communications Limited (OCL), the parent company of Paytm Payments Bank Ltd., on July 15, 2024, concerning certain related party transactions (RPTs) conducted by OCL and its subsidiaries with Paytm. This warning followed an analysis of financial disclosures for the fiscal year ending March 31, 2022.
SEBI aims to enhance corporate governance and transparency in the Indian securities market by refining disclosure requirements for listed companies. The regulations define an RPT as any transaction involving resource transfer, services, or obligations between related parties, regardless of pricing. Related parties include promoters, directors, key managerial personnel, major shareholders, subsidiaries, holding companies, and associates.
Under SEBI regulations, transactions with related parties must receive prior approval from the audit committee, and material transactions also require shareholder approval. To determine if a transaction qualifies as an RPT, several factors must be considered, such as the parties involved, their connection to the company, the transaction’s duration, cumulative value, and other material terms.
SEBI’s July 11, 2023 Master Circular on LODR Regulations outlines specific details required for audit committee and shareholder review of RPTs.
Paytm Transaction:
SEBI's warning highlighted that some transactions between OCL and Paytm exceeded the audit committee’s approved amount without proper approvals. While OCL argued these transactions did not constitute RPTs, the audit committee deemed them material and set limits on transaction amounts.
Linde India:
On April 29, 2024, SEBI issued an Interim Order, followed by a final order on July 24, 2024, against Linde India Limited (LIL) for failing to obtain shareholder approval for significant RPTs with Praxair India Private Limited. SEBI found that the combined value of these transactions significantly surpassed 10% of LIL’s previous year’s turnover, necessitating shareholder approval. LIL’s narrow interpretation of the RPT definition and reliance on an external guidance note were dismissed by SEBI, which emphasized that all related transactions within a financial year must be considered together.
Conclusion:
SEBI's actions reflect increased scrutiny of RPTs and their disclosure. To mitigate risks and comply with regulations, Indian listed companies should establish and adhere to comprehensive RPT policies and regularly update them in line with regulatory changes.
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