The Curious Case of unlisted RPTs, compliance & SEBI

Earlier in October 2024, the Securities and Exchange Board of India (SEBI) appears to have provided some important guidance through a response to a request from Bajaj Finserv Limited (BFS). This guidance pertains to the applicability of related party transaction (RPT) provisions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) in cases involving unlisted subsidiaries of listed entities.

The legal intricacies of RPTs, particularly when they involve subsidiaries, are crucial for compliance and corporate governance.

Factual Background

BFS, a listed entity on the NSE and BSE, holds a 74% equity stake in Bajaj Allianz General Insurance Company Limited (BAGIC), an unlisted general insurance company. The remaining 26% is held by Allianz SE. It is pertinent to note that Allianz SE is not a related party to BFS under the LODR Regulations, but it qualifies as a related party of BAGIC. BAGIC, acting in accordance with Insurance Regulatory and Development Authority of India (IRDAI) regulations, entered into a reinsurance treaty with Allianz SE. BFS approached SEBI seeking clarity on the following key issues:

1. Whether the materiality threshold specified under Regulation 23(1) of LODR (Rs. 1,000 crore or 10% of consolidated turnover, whichever is lower) applies to a transaction between BAGIC (a subsidiary) and Allianz SE (a related party of BAGIC but not of BFS)?

2. If the materiality threshold is triggered, whether the transaction requires shareholder approval of the listed parent company (BFS)?

3. How the value of a reinsurance treaty, where certain components like claims are contingent, should be calculated for determining materiality under the LODR Regulations?

   
   

SEBI’s Response

In its response, SEBI emphasized that the definition of a “related party transaction” (Regulation 2(1)(zc) of LODR) is broad enough to include transactions between a subsidiary of a listed entity and a related party of that subsidiary, even if that party is not directly related to the listed parent entity. This interpretation ensures that transactions involving subsidiaries do not escape the purview of regulatory scrutiny, even when the listed entity itself is not a direct participant in the transaction.

This in mind, SEBI clarified that the materiality threshold under Regulation 23(1) of LODR would indeed apply to transactions between BAGIC and Allianz SE. The mere fact that Allianz SE is not related to BFS does not exclude the transaction from being classified as an RPT, given the subsidiary’s involvement. Consequently, if the transaction exceeds this threshold, it would be deemed material, triggering the requirement for approval by the shareholders of BFS.

Shareholder Approval and Compliance Requirements

SEBI further elaborated that all material related party transactions under Regulation 23(4) of LODR require prior approval of shareholders of the listed entity, i.e., BFS. This would apply even though the transaction in question is between the unlisted subsidiary (BAGIC) and a related party of the subsidiary (Allianz SE). SEBI’s interpretation ensures that shareholders of the listed entity are involved in approving substantial transactions that affect the group, reinforcing principles of transparency and governance.

Applicability of LODR to Unlisted Subsidiaries

SEBI also addressed whether unlisted subsidiaries, like BAGIC, are required to adhere to the LODR definition of “related party” when identifying related parties, or if they could follow the applicable laws governing unlisted entities. SEBI unequivocally stated that unlisted subsidiaries of listed entities must comply with the LODR Regulations in this regard. This ensures uniformity in identifying related parties across both listed and unlisted entities within a group structure.

SEBI’s responses provide crucial clarity on the extension of transactions involving unlisted subsidiaries.

The author is a fourth-year student pursuing a B.A LL.B programme at the Army Institute of Law, Mohali.