Sebi plans to ease related-party transaction rules for big companies

Move to lead to fewer approvals from shareholders, audit panel

In a revamp of related-party transaction (RPT) norms, the Securities and Exchange Board of India (Sebi) on Monday proposed linking materiality thresholds of such transactions to a listed company’s turnover, a move that is expected to benefit bigger firms more.

 

The proposed changes may reduce the number of RPTs requiring shareholders’ approval by around 60 per cent for the top 100 listed companies, according to a back-test conducted by the securities regulator.

 

Under the current regulations, an RPT is considered material if the transaction exceeds ₹1,000 crore or 10 per cent of the annual consolidated turnover of the listed company, whichever is lower.

 

Sebi has called this ‘one-size-fits-all’ approach onerous for large listed firms and has proposed increasing the threshold as turnover increases. Listed companies have to seek approval of shareholders and the audit committee for material RPTs.

 

Under the new norms, if the annual turnover is up to ₹20,000 crore, the threshold will be

 

10 per cent. If the turnover is between ₹20,001 crore and ₹40,000 crore, the threshold will be ₹2,000 crore plus 5 per cent of the annual consolidated turnover.

 

For companies with turnover more than ₹40,000 crore, the threshold will be ₹3,000 crore plus 2.5 per cent of the turnover or ₹5,000 crore, whichever is lower. Sebi said the ceiling of ₹5,000 crore is to protect the interest of minority shareholders.

 

RPT norms play a critical role in transparency and accountability while keeping the financials in check.

 

“As a result of absolute threshold, RPTs of ₹1,000 crore, which may not be substantive in comparison to turnover and scale of operations, are also being categorised as material transactions for listed entities with high turnover,” said Sebi.

 

Shriram Subramanian of proxy advisory firm InGovern Research said the relaxations were practical as long as the disclosures on RPTs are made to audit committees and shareholders.

 

“These relaxations have been a demand from corporate India as audit committees and compliance burdens have increased. Companies that indulge in abusive RPTs will anyway choose to hide information from minority shareholders,” said Subramanian.

 

The proposal is based on recommendations from an advisory committee on listing obligations and disclosure requirements (LODR) regulations.

 

Sebi has also proposed changing the threshold for RPTs undertaken with a subsidiary of the listed company where the listed company is not a part of the transaction. Such a transaction exceeding ₹1 crore will require approval from the audit committee only if the value exceeds 10 per cent of the annual standalone turnover of the subsidiary or the thresholds of the RPT under the LODR, whichever is lower.

 

“In case of subsidiaries, which do not have financial track record, that is published financial statements for at least one year, the percentage-based threshold may be specified as 10 per cent of standalone net worth of the subsidiary computed on a date not more than three months prior to the date of seeking approval and it shall be certified by a practicing chartered accountant,” noted Sebi.

 

Another key change is to provide exemption to the relatives of the directors and key managerial personnel on certain retail purchases from the listed company or its subsidiary when considering RPT.

 

Further, the regulator has proposed that an omnibus approval given by the shareholders in an AGM will be valid up to the date of the next AGM but not exceeding 15 months. Further, if the approvals were obtained in general meetings other than AGMs, it will be valid for a year.

 

The regulator has also proposed a change in the recent standards formulated along with the industry bodies on disclosures of RPTs.

 

If the proposed amendments are adopted, it will deliver major relief to India Inc facing high transaction volumes, said experts. 

At a glance

 

Proposed thresholds based on turnover

 

• Up to ₹20,000 crore: 10% of the annual consolidated turnover of listed company
• ₹20,001 – ₹40,000 crore: ₹2,000 crore + 5% of turnover
• Above ₹40,000 crore: ₹3,000 crore + 2.5% of turnover or ₹5,000 crore (whichever is lower)

 

What changes?

 

• At present, RPTs are ‘material’ if the transaction exceeds ₹1,000 cr or 10% of the company’s consolidated turnover — whichever is lower
• New thresholds will reduce material RPTs requiring shareholder nod by 60% for the top 100 NSE-listed companies
• No more ‘one size fits all’ approach