Merger / Demerger – Related Party Transactions Minimum Disclosures to Audit Committee and Shareholders. - MMJC

Securities and Exchange Board of India (‘SEBI’) has issued a circular dated February 14, 2025, for Industry Standards on Minimum information to be provided for Review of the Audit Committee and Shareholders for Approval of a Related Party Transaction (RPT)’ (‘RPT Industry Standards’).

SEBI Master circular dated 20 June 2023 on (i) Scheme of Arrangement by Listed Entities and (ii) Relaxation under Sub-rule (7) of rule 19 of the Securities Contracts (Regulation) Rules, 1957 already covers certain points(1) that should be looked into by audit committee (irrespective whether the transaction is with related party or not ) while recommending the draft scheme to the board of directors as follows:

• Need for the merger/demerger/amalgamation/arrangement
• The rationale of the scheme
• Synergies of business of the entities involved in the scheme
• Impact of the scheme on the shareholders
• Cost-benefit analysis of the scheme.

Now, since there is a specific SEBI Circular dealing with the Scheme of arrangement by Listed entities will it be sufficient only to comply with SEBI Master circular dated 20 June 2023?

RPT Industry Standards specifically does not cover any disclosures with regards to a transaction of merger/ demerger between related parties. 

The definition of related party transaction under 2(1) (zb) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’) is wide enough to cover the Merger / Demerger transactions.

Let us understand what is Related party Transaction in case of Merger / Demergers?

There may be two scenarios

• First, the transaction of merger/demerger itself is a related party transaction i.e, the consideration of merger/ demerger will have to be looked into and therefore disclosure under A1 to A5 and B1 may be warranted.
• Secondly, in case of Merger/ Amalgamations and demerger, all the assets and liabilities of the transferor company becomes the assets and liabilities of transferee company (under 2(1B) & 2(19AA) of Income tax Act,1961) and therefore disclosures related to all the balance sheet items i.e., B3 to B7 will be required to be disclosed to audit committee if those balance sheet items i.e., loans, Investments, Guarantees and borrowings of the transferor companies are with related parties of transferee company, as all this transactions will come under transferee company post-merger/demerger. 

What are Balance sheet item as per RPT Industry Standards?

• B (3) – Loans, inter-corporate deposits or advances given by the listed entity or its subsidiary.
• B (4) – Investment made by the listed entity or its subsidiary.
• B (5) – Guarantee (excluding performance guarantee), surety, indemnity or comfort letter, by whatever name called, made or given by the listed entity or its subsidiary.
• B (6) – Borrowings by the listed entity or its subsidiary; and
• B (7) – Sale, lease or disposal of assets of subsidiary or of unit, division or undertaking of the listed entity, or disposal of shares of subsidiary or associate.

SEBI Master circular dated 20 June 2023 relating to the scheme of arrangement by listed entities does not cover the aspects of disclosures to athe udit committee from the context of Merger /Demerger with related parties and therefore in case of a transaction of Merger/Demerger between a Listed Entity and the Company where shareholder to whom shares will be allotted is a related party or Loans, Investment, Guarantee and Borrowing is with related parties, the Listed entities will have to consider minimum information as per RPT Industry Standards.

The Regulators steps for increased disclosures around related party transactions is a clear message that Listed entities should follow the most Ethical and Transparent Business operations.

Under RPT Industry Standards, audit committee is expected to give justifications while approving certain transactions, further the comments of audit committees shall be recorded in the minutes of the meetings. It all indicates that Companies should run the business operations mutually exclusive and avoid overlapping of horizontal business operations with common resources within multiple entities increasing related party transactions or avoid entities within the group having no incomes or no businesses and the toll of which are taken up by the other companies within the groups increasing the related party transactions.

Restructuring of Business Operations including mergers/ demerges may become a common trend with the Growing Governing provisions around related party transactions and its disclosures.

1. Part I, Para A (2) (c) of SEBI Master Circular SEBI/HO/CFD/POD-2/P/CIR/2023/93 – dated June 20, 2023