The regulatory context:

One frequently encountered compliance question in corporate governance practice is whether a listed company’s loan to its wholly owned subsidiary requires prior Audit Committee or shareholder approval under  SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”).

Definitional clarity: Under Regulation 2 (zc) of the SEBI LODR, any loan advanced by a listed entity to its WOS qualifies as a related party transaction as it constitutes a “transfer of resources” between the listed entity and a related party. As per Regulation 2 (zb) of SEBI LODR, both the listed entity and its WOS are related parties.

Regulatory exemption: The need for prior approval must be seen in light of Regulation 23 (5) (b) of SEBI LODR. This provision carves out an important exemption for transactions between a holding company and its WOS, from the requirement of prior approvals of the Audit Committee and shareholders, provided the following two conditions are met:

1. The accounts of the WOS are consolidated with the holding company; and

2. The consolidated financial statements are placed before the shareholders at the general meeting for approval.

Disclosure obligations remain: Even though prior approvals are not required in such cases, the compliance responsibility does not end there. The transaction must still be disclosed to the stock exchanges and published on the website of the listed entity in accordance with Regulation 23 (9) of SEBI LODR.

Governance takeaway: The regulations offer a balanced approach – while prior approvals are not needed for such transactions with wholly owned subsidiaries, disclosure is still required to maintain transparency and good governance. Ultimately, these provisions reflect SEBI’s intent to balance ease of intra-group funding with the need for transparency, reinforcing investor confidence in the governance practices of listed companies.