Recent informal guidance from the market regulator on Bajaj Allianz General Insurance Company (BA) could broaden the interpretation of what constitutes related party transactions (RPTs) and impact subsidiaries of listed companies that have joint venture partners.

Until now, a plain reading of the law suggested that the applicability of the RPT standards was limited to parties related to listed entities and did not include a transaction between a subsidiary of a listed entity and a party that is not a party related to the listed entity. .

This would mean that the RPTs of unlisted subsidiaries with their unlisted related parties do not fall under SEBIs regulatory framework.

The affair

Bajaj Finserv holds a 74 percent stake in BA and the remaining 26 percent 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.

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

Impact

“The informal guidelines, while not constituting a binding precedent, will have a significant impact on listed companies having joint ventures through their subsidiaries, particularly in sectors regulated by SEBI, RBI or IRDAI, where the Listed companies are often required to operate through separate entities,” Binoy said. Parikh, Executive Director, Katalyst Advisors.

The joint venture partners, as strategic investors playing an active role in the subsidiary’s operations, are likely to engage in transactions with the subsidiary.

“When these subsidiaries engage in transactions with their joint venture partners – whether capital transactions or those carried out in the ordinary course of business – the approval of the shareholders of the listed entity will be required if the significance thresholds are exceeded. This will impact timelines and these transactions will be at the mercy of public shareholders,” Parikh said.

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

Pingle believes that the scope of related parties under SEBI’s listing regulations is already much wider than that provided for under the Companies Act. The related parties defined therein are quite limited and are not subject to further legal interpretation. “To facilitate business and ensure compliance, RPT regulations need to be aligned,” he said.

Divay Rastogi, lawyer at DMD Advocates, said the guidelines seek to clarify that a transaction between a subsidiary of a listed entity and a party related to the subsidiary (which is not a party related to the listed entity) will fall within the scope of Regulation 23(1) when the thresholds set out therein are exceeded.

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