The new SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, will become effective from December 1.These regulations will replace the listing agreements that companies execute with stock exchanges. All SEBI circulars issued so far regarding listing agreement will also stand repealed.

But this doesn’t mean there will be no listing agreements now. Regulation 109 of the new regulations requires signing of a listing agreement, depending on the nature of securities that a company issues and lists on stock exchanges. Unlike before, listing agreements will be much shorter because provisions that listing agreements covered are now included in these regulations.

The regulations are in alignment with the Companies Act, 2013. This will remove many contradictions that exist between the two regulations.

Two provisions have been already effective since September 2: regulations 23(4) and 31A. Regulation 23(4) requires material related party transaction (RPT) to be approved by shareholders’ ordinary resolution and doesn’t permit related party to vote on that resolution. Earlier, shareholders’ special resolution was needed. Regulation 31A requires separate disclosure about promoter and promoter group in the shareholding pattern and allows them to modify or re-classify themselves subject to certain conditions.

The real picture In reality, though, all the new RPT provisions are in force because the remaining parts of Regulation 23 are already covered in Clause 49 of the listing agreement. Clause 49 will continue to govern the RPT until December 1. The change from special to ordinary resolution is a substantial move. In fact, when the Companies Act was originally passed, it also provided for a special resolution but was later amended to ordinary resolution from May 29, 2015. Now, both regulations stand aligned on this aspect. Whether this amendment is good or bad will continue to be debated. It is only fair and impartial that the RPT is approved by simple majority instead of a super majority of disinterested shareholders.

However, the two regulations differ on many crucial aspects. The meaning of RPT is much wider in the new regulations which cover many transactions that are outside the ambit of the Companies Act. For instance, any loan to a related party or corporate guarantee for loan taken by a related party is not RPT under the Companies Act but is covered under the new regulations.

Unlike their listed counterparts, unlisted companies do not require to formulate any policy on materiality and dealing with the RPT.

Harsh aspect The limits beyond which shareholders’ approval is sought also vary. While in listed companies, shareholders’ approval is sought when transactions individually or in aggregate during any financial year cross 10 per cent of annual consolidated turnover based on the last audited financial statement, for unlisted companies, it is based on varying limits of ‘turnover’ or ‘networth’ depending on the nature of the RPT. Ironically, for listed companies the threshold of ‘consolidated’ turnover is an easier requirement than the Companies Act’s limit on ‘standalone’ turnover. Since the Companies Act is stringent on this, it will prevail over the new regulations.

A related party in a listed company needs to abstain from voting whether or not it is a related party in the context of RPT to be executed. In unlisted companies (other than private companies) a related party is only in the context of the RPT for which shareholders’ resolution is sought. Related parties in private companies have no restriction on voting — in spite of being interested, they can still vote.

RPT in listed companies is not exempted even if executed at arm’s length and in the ordinary course of business. This is a very critical difference.

Lastly, the Companies Act exempts all existing contracts from complying with the new law if they were executed in compliance with the law prevailing at the time of their execution; but for listed companies, the regulations require all existing material RPT to seek approval in the first shareholders’ meeting held after these regulations become effective. This could be harsh and can make these regulations retrospective in nature.

The writer is a partner at J Sagar Associates. The views are personal

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