RPTs falling within revised materiality threshold to take shareholders’ approval after April 1, 2022

RPTs falling within revised materiality threshold to take shareholders’ approval after April 1, 2022| Key decisions at SEBI board meeting – Simplification of procedure for transmission of securities, revision in regulatory framework for CISs, provision of custodial services in respect of silver ETFs

SEBI has introduced the following changes:

 A. Clarifications issued in respect of Related Party Transactions (RPTs): With the objective of providing a smooth implementation of the amended Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) relating to RPTs which is due to become effective from April 1, 2022 – SEBI has issued certain clarifications in respect of the requirement of shareholders’ approval:

• RPTs approved by both audit and shareholders prior to April 1, 2022 will not require fresh approval of shareholders;
• RPTs approved by the audit committee prior to April 1, 2022, but becomes material thereafter, to require shareholders’ approval in the first general meeting held after April 1, 2022;
•  Material RPTs for which the audit committee has granted omnibus approval, will require shareholders’ approval.

B.  Amendments approved at the SEBI board meeting: SEBI has taken the following key decisions at its board meeting held on March 29, 2022, in addition to approving the budget estimates for the financial year 2022-23:

i. Simplification of procedure for transmission of securities;

ii. Enhancement of net-worth criteria, mandatory investment by Collective Investment Management Company (CIMC) and its designated employees to provide skin in the game, restriction on shareholding in another CIMC and other changes to the framework for Collective Investment Schemes (CIS);

iii. Custodians registered with SEBI under SEBI (Custodian) Regulations, 1996, to be permitted to provide custodial services in respect of silver or silver related instruments held by silver exchange-traded fund (ETFs) of mutual funds;

The aforementioned changes have been discussed below:

A.  Clarifications issued in respect of Related Party Transactions (RPTs)

SEBI had vide notification dated November 9, 2021 (available here) amended regulation 23 of the LODR Regulations which inter-alia, proved for a revised materiality threshold for seeking shareholders’ approval, which is due to come into effect from April 1, 2022.

With the objective of providing a smooth implementation of the amended Regulation 23 of the LODR Regulations, SEBI has issued following clarifications:

• Fresh approval from shareholders not required: No requirement to seek fresh approval from the shareholders for an RPT that has been approved by the audit committee and shareholders prior to April 1, 2022.
• Shareholders’ approval required for material RPTs approved by audit committee prior to April 1, 2022: Pursuant to Regulation 23(8) of the LODR Regulations, an RPT that has been approved by the audit committee prior to April 1, 2022 which continues beyond such date and becomes material as per the revised materiality threshold, shall be placed before the shareholders in the first general meeting held after April 1, 2022.
• Omnibus approval granted for RPT: An RPT for which the audit committee has granted omnibus approval, shall continue to be placed before the shareholders if it is material in terms of Regulation 23(1) of the LODR Regulations.
• Explanatory statement to shareholders: The explanatory statement contained in the notice sent to the shareholders for seeking approval for an RPT shall provide relevant information so as to enable the shareholders to take a view whether the terms and conditions of the proposed RPT are not unfavorable to the listed entity, compared to the terms and conditions, had similar transaction been entered into between two unrelated parties. The information so provided shall include but not be limited to the information specified in circular dated November 22, 2021 (available here) so as to enable to the shareholders to take an informed decision.

The above clarifications have been issued by SEBI vide circular dated March 30, 2022 (available here) and shall come into effect from April 1, 2022.

B. Amendments approved at the SEBI board meeting

SEBI has taken the following key decisions at its board meeting held on March 29, 2022 (press release is available here), in addition to approving the budget estimates for the financial year 2022-23:

I. Simplification of procedure for transmission of securities

With the objective of ensuring that uniform processes is followed by the Registrars to an Issue and Share Transfer Agents (RTAs) /listed companies in case of transmission of securities, SEBI has approved the following amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) for easing the overall transmission process for investors:

• Revised threshold limit for simplified documents: The existing threshold limit for simplified documents has been revised:

Particulars	Revised limit
For securities held in physical mode per listed issuer	From INR 2,00,000 to INR 5,00,000
For securities held in dematerialized mode for each beneficiary account	From INR 5,00,000 to INR 15,00,000

• Heirship certificate: Legal heirship certificate or its equivalent certificate issued by competent Government authority will be an acceptable document for transmission of securities.

II. Changes to the Collective Investment Schemes (CIS) regulatory framework

In order to strengthen the regulatory framework for Collective Investment Schemes (CIS) in line with SEBI (Mutual Fund) Regulations, 1996, the following key amendments to the SEBI (Collective Investment Schemes) Regulations, 1999 (CIS Regulations) have been approved:

• Net worth Criteria: Enhancement of net-worth criteria and requirement of having track record in relevant field as an eligibility requirement for registration as a Collective Investment Management Company (CIMC).
• Restriction on shareholding in another CIMC: CIMC and its group/ associates/ shareholders are restricted to 10% shareholding or representation on board of another CIMC to avoid conflict of interest.
• Skin in the game: Mandatory investment of CIMC and its designated employees in the CIS to align their interest with that of the CIS.
• Other mandatory requirements: Mandatory requirement of minimum number of investors, maximum holding of a single investor and minimum subscription amount at CIS level.
• Fees and expenses: Rationalization of fee and expenses to be charged to the scheme.
• Speedy procedures: Reduction of timelines for offer period of scheme, allotment of units and refund of money to investors.

III. Custodial services of silver and silver related instruments by SEBI registered custodians

SEBI approved amendments to the SEBI (Custodian) Regulations, 1996, to enable SEBI registered custodians to provide custodial services in respect of silver or silver related instruments held by silver exchange-traded fund (ETFs) of mutual funds.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.