A recent informal guidance by the market regulator in the matter of Bajaj Allianz General Insurance Company (BA) could widen the interpretation of what constitutes related party transactions (RPT) and impact subsidiaries of listed companies that have joint venture partners.

Until now, a plain reading of the law suggested that the applicability of RPT norms is restricted to related parties of listed entities and does not include a transaction between a subsidiary of a listed entity and a party which is not a related party of the listed entity.

This would mean that RPTs of unlisted subsidiaries with their unlisted related parties do not fall under SEBI’s regulatory ambit.

The matter

Bajaj Finserv has a 74 per cent stake in BA and the remaining 26 per cent is held by Alliance SE. There was a reinsurance transaction between BA and Alliance SE.

Alliance SE is not a related party of Bajaj Finserv. This is a transaction between the latter’s unlisted subsidiary and its related party, and should not have constituted an RPT.

SEBI in its guidance, however, has ruled that RPT norms will apply in this case as the materiality threshold of Rs 1,000 crore, or 10 per cent of consolidated turnover, has been breached. And any transaction, if material, will require the approval of shareholders of the listed entity.

Impact

“The informal guidance, although not a binding precedent, will significantly impact listed companies with joint ventures through their subsidiaries, particularly in sectors regulated by SEBI, RBI, or IRDAI, where listed companies are often required to operate via separate entities,” said Binoy Parikh, Executive Director, Katalyst Advisors.

JV partners, being strategic investors with active roles in subsidiary operations, are likely to engage in transactions with the subsidiary.

“When these subsidiaries engage in transactions with their JV partners —whether capital transactions or those conducted in the ordinary course of business — shareholder approval of the listed entity will be required if materiality thresholds are breached. This will impact the timelines and such transactions will be at the mercy of public shareholders,” said Parikh.

“Unlisted subsidiary companies may now be required to comply with SEBI’s listing or LODR norms with respect to identifying ‘related parties’ and ‘related party transactions’ compliance, inspite of the fact that only the Companies Act is applicable to such unlisted companies. This would be practically difficult for foreign subsidiaries of Indian companies for which neither the Indian Companies Act nor SEBI’s listing norms are applicable,” said Gaurav Pingle, a practicing company secretary.

Pingle believes that the scope of related parties under SEBI’s listing regulations is already much wider than that under Companies Act. Related parties defined under the latter are quite limited and not subject to further legal interpretation. “For ease of doing business and compliance, the RPT regulations need to be aligned,” he said.

Divay Rastogi, Counsel at DMD Advocates said the guidance seeks to clarify that a transaction between a subsidiary of listed entity and a related party of the subsidiary (which is not a related party of the listed entity) will fall within the ambit of the proviso to Regulation 23(1) where the thresholds set out therein are breached.

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