Does Office Lunch to a KMP by the Company count to a Related Party Transaction?

Today we had an excellent lunch with all our employees at a restaurant. Suddenly, a thought arose: Could this be considered a related party transaction (RPT) involving a KMP?

Let’s first understand what constitutes a related party transaction under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR):

Definition of Related Party Transaction as per LODR

Regulation 2(zc):
A “related party transaction” means a transaction involving a transfer of resources, services, or obligations between:

1. (i) A listed entity or any of its subsidiaries on one hand, and a related party of the listed entity or any of its subsidiaries on the other hand; or
2. (ii) A listed entity or any of its subsidiaries on one hand, and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries, with effect from April 1, 2023.

This applies regardless of whether a price is charged, and a “transaction” with a related party includes a single transaction or a group of transactions in a contract.

Exclusions from Related Party Transactions:

The following are explicitly excluded from the definition of RPTs:
(a) Issuance of specified securities on a preferential basis, subject to compliance with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
(b) Certain corporate actions by the listed entity uniformly applicable/offered to all shareholders in proportion to their shareholding, such as:

• Payment of dividend.
• Subdivision or consolidation of securities.
• Issuance of securities by way of rights issue or bonus issue.
• Buy-back of securities.
  (c) Acceptance of fixed deposits by banks/Non-Banking Finance Companies at terms uniformly applicable/offered to all shareholders/public, subject to specific disclosures.

This definition does not apply to units issued by mutual funds listed on recognized stock exchanges.

Analysis

1. Applicability of Clause (i):
   This clause clearly does not apply, as the transaction does not involve a related party directly.

2. Applicability of Clause (ii):
   While Clause (ii) mentions transactions with third parties that benefit a related party, careful examination reveals that this scenario does not meet the requirements.

   The reasoning:

   • The transaction is between the company (the listed entity) and a third-party restaurant.
   • Although the KMP (Key Managerial Personnel) benefits from the lunch, it does not qualify as a transfer of resources, services, or obligations in the context of RPTs.
   • The purpose of the transaction is an employee benefit expense, which is a routine business expense, not a targeted benefit to the KMP or any related party.

Conclusion

The key elements required to constitute a related party transaction (RPT) under SEBI LODR are missing in this case. Therefore, the office lunch does not qualify as a related party transaction.

With that clarified, I happily resumed enjoying the lunch!

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From the desk of CS Sharath