Mumbai: The Reserve Bank of India (RBI) on Monday made changes to its October proposals on related party transactions of banks and non-bank financiers, accepting a clutch of suggestions from the industry.
In October the regulator had proposed changes to regulations on lending to counterparties that are related or connected to the lending bank. This could be either through ownership in the bank or through their ability to control and influence the lending decisions.
The RBI said at the time that such control may prove detrimental to the interests of the bank and other stakeholders. “As related parties can be many entities other than what is covered under extant statutory or regulatory restrictions, direct or indirect lending to such related parties remains a regulatory concern,” it said in October.
Existing transactions can continue
On Monday the RBI said ‘stakeholders’ had requested it to allow existing related-party transactions that do not comply with the new directions to continue until their contractual maturity, and to do away with the requirement of a one-year run-off period. Accepting the suggestion, the RBI said all existing transactions not complying with the regulatory prohibitions could continue until there was any enhancement, renewal, re-pricing, or any change in the terms and conditions of such transactions.
Changes to definition of related party
The regulator also accepted and rejected certain changes to its proposed nine-point definition of a related party.
The original definition included entities in which a related person or a relative of the related person is:
- a partner, manager, key managerial personnel, director or a promoter;
- or a shareholder who holds more than 10% of the equity share capital or paid-up equity share capital of ₹5 crore, whichever is less.
“Stakeholders’ comments have flagged that the scope of definition of related party is very wide,” the RBI said on Monday. “It captures relatives of the related persons who are already covered as related persons.”
Here, the RBI accepted two changes suggested by the industry and rejected one. It said since relatives of a ‘related person’ were already included, the reference to relatives in the definition of ‘related party’ has been removed. Second, the ₹5 crore threshold has been removed from the definition.
However, the banking and finance industry also sought an alignment of the definition of related party with the existing framework prescribed by the markets regulator, the Securities and Exchange Board of India (Sebi), which RBI rejected.
“Exact alignment with the SEBI LODR (listing obligations and disclosure requirements) definition of related party was not considered, as the regulatory objectives of the two frameworks are different,” the central bank said.
