SEBI Proposes Threshold-Based Framework for Related Party Transactions: What Indian Investors Need to Know
The Securities and Exchange Board of India (SEBI) has proposed a threshold-based framework to determine the materiality of related party transactions (RPTs), based on the annual consolidated turnover of listed entities. This move aims to protect the interests of minority shareholders and promote transparency in the Indian stock market.
Current Challenges with Related Party Transactions
Under the current Listing Obligations and Disclosure Requirements (LODR) norms, a listed entity is required to consider an RPT as material if the transaction, either individually or taken together with previous transactions during a financial year, exceeds Rs 1,000 crore or 10% of the entity’s annual consolidated turnover, whichever is lower, as per its last audited financial statements.
However, stakeholders have raised concerns that the current provision requiring shareholder approval for RPTs exceeding Rs 1,000 crore or 10% of the consolidated turnover, whichever is lower, is onerous for listed entities with high turnover. Additionally, the absolute materiality threshold of Rs 1,000 crore promotes a ‘one-size-fits-all’ approach, as all listed entities are treated the same regardless of their turnover, operational scale, or business model.
Proposed Threshold-Based Framework
SEBI’s proposed framework aims to address these concerns by introducing a threshold-based approach to determine the materiality of RPTs. For entities with turnover up to Rs 20,000 crore, a transaction will be considered material if it exceeds 10% of the annual consolidated turnover.
In the case of entities with turnover between Rs 20,001 crore and Rs 40,000 crore, the threshold should be Rs 2,000 crore plus 5% of the turnover exceeding Rs 20,000 crore. For entities with turnover exceeding Rs 40,000 crore, the threshold will be Rs 3,000 crore plus 2.5% of the turnover exceeding Rs 40,000 crore, or Rs 5,000 crore, whichever is lower.
SEBI has also proposed an absolute threshold of Rs 5,000 crore as an upper ceiling for listed entities having turnover above Rs 40,000 crore, to protect the interests of minority shareholders.
Relaxation in Minimum Information Required for RPT Approvals
Alongside the materiality threshold proposal, SEBI has suggested a relaxation in the minimum information required to be furnished to the audit committee and shareholders for RPT approvals. If the total value of RPTs with a related party in a financial year, including ratified transactions, does not exceed 1% of the listed entity’s annual consolidated turnover or Rs 10 crore, whichever is lower, then a simplified set of disclosures may be submitted for approval.
This reduced information requirement will be less detailed than what is mandated under the current industry standards. The existing exemption for transactions up to Rs 1 crore will continue to apply.
Changes to Omnibus Approvals for RPTs
SEBI has also proposed changes related to omnibus approvals for RPTs. Omnibus approvals taken in an annual general meeting will remain valid until the next AGM, subject to a maximum period of 15 months. Omnibus approvals obtained in any other general meeting will be valid for a period not exceeding one year.
Implications for Indian Investors
The proposed threshold-based framework and relaxation in minimum information required for RPT approvals are expected to have significant implications for Indian investors. By introducing a more nuanced approach to determining the materiality of RPTs, SEBI aims to promote transparency and protect the interests of minority shareholders.
Indian investors should closely monitor the developments on this proposal and provide their feedback to SEBI before the deadline of August 25. As the regulator continues to evolve and refine its regulatory framework, it is essential for investors to stay informed and adapt to the changing landscape of the Indian stock market.
For more information on the proposed framework and its implications for Indian investors, visit the SEBI website or consult with a financial advisor.
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