SEBI to modify rules on related party transactions
The proposal introduces turnover-based thresholds to determine the materiality of transactions
SEBI to modify rules on related party transactions
The proposal introduces turnover-based thresholds to determine the materiality of transactions
The Securities and Exchange Board of India (SEBI) has proposed revised guidelines on related party transactions (RPTs) or deals between a listed firm and a linked entity (promoters), to ease compliance needs for such companies.
SEBI’s consultation paper stated that the norms determine when an RPT is considered 'material' and requires shareholder approval.
(Materiality threshold is the cut-off value that decides whether an RPT is large enough for the management of a listed entity to seek the approval of the company's shareholders. This is to protect the interests of public shareholders from unfair dealings by the promoters or group companies related to the promoters).
Companies with turnovers up to ₹Rs.20,000 crore must treat an RPT as material only if the listed entity’s annual turnover of the transaction is over 10 percent.
For companies having turnovers between Rs.20,001 crore and Rs.40,000 crore, the threshold will be Rs.2,000 crore plus 5 percent of the amount above Rs.20,000 crore.
Similarly, for listed entities with turnovers above Rs.40,000 crore, the threshold would be Rs.3,000 crore plus 2.5 percent of the amount above Rs.40,000 crore, or Rs.5,000 crore (whichever is lower).
Currently, an RPT is treated as material if it exceeds Rs.1,000 crore, or 10 percent of a company's annual consolidated turnover (whichever is lower).
The consultation paper further reads, "The provision requiring shareholder approval for RPTs exceeding Rs.1,000 crore or 10 percent of consolidated turnover of the listed entity, whichever is lower, becomes onerous for listed entities with high turnovers. The absolute materiality threshold of Rs.1,000 crore propagates a 'one-size-fits-all' approach as listed entities are treated alike, irrespective of their turnover, scale of operations and nature of business."
Meanwhile, the regulator is also contemplating tightening checks on RPTs done by subsidiaries of listed companies. It has recommended that an RPT by a subsidiary worth over Rs.1 crore will get prior approval from the listed company's audit committee if the transaction crosses a certain limit.