The Securities and Exchange Board of India (SEBI) has amended the rules governing disclosure of related party transactions (RPTs) by amending the current threshold limits that are linked to the annual consolidated turnover of the companies.
"The amendments are aimed to address practical challenges and remove ambiguities and also strike a balance between investor protection and ease of doing business, with respect to the related party transaction (RPT) framework," stated the SEBI release.
Amendments include, among other things, introduction of scale-based thresholds based on annual consolidated turnover of the listed entity, for determining material RPTs; revised thresholds for approval by Audit Committee, for RPTs undertaken by subsidiaries; and simpler disclosure requirements for smaller RPTs.
For companies with annual consolidated turnover of up to Rs 20,000 crore, threshold has been fixed at 10% of the annual consolidated turnover of the listed entity. For those with annual consolidated turnover of between Rs 20,001 crore and Rs 40,000 crore, threshold has been fixed at Rs 2,000 crore plus 5% of the annual consolidated turnover of the listed entity above Rs 20,000 crore.
Similarly, for companies with annual consolidated turnover of more than Rs 40,000 crore, threshold has been fixed at Rs 3,000 crore plus 2.5% of the annual consolidated turnover of the listed entity above Rs 40,000 crore or Rs 5000 crore, whichever is lower.
Further, threshold for prior approval of audit committee of listed entity for RPTs (above Rs 1 crore), whether entered into individually or taken together with previous transactions during a financial year, undertaken by subsidiaries has been revised in order to remove ambiguity, where RPTs undertaken by subsidiary being classified as material RPT and therefore requires approval of shareholders of the listed entity, but does not require approval of audit committee of the listed entity, as per the SEBI release.
“… it is felt that there is need to revisit the threshold for material RPT and also to introduce a scale-based threshold mechanism for material RPT based on the turnover of listed entities for ease of doing business,” SEBI had stated in a consultation paper issued in August.
“The approach of scale-based threshold would ensure that materiality threshold increases with the increase in the turnover of the company leading to an appropriate number of related party transactions being categorized as material thereby reducing the compliance burden of listed entities,” stated the consultation paper.
The capital market regulator had proposed a threshold of 10% of the annual consolidated turnover of the listed entity if the consolidated turnover of the firm is up to Rs 20,000 crore.
Further, for companies with a consolidated turnover between Rs 20,001 crore and Rs 40,000 crore, the threshold had been proposed as Rs 2,000 crore plus 5% of annual consolidated turnover of the listed entity above Rs 20,000 crore.
Thereafter, for firms with a consolidated turnover of more than Rs 40,000 crore, the threshold suggested was Rs 3,000 crore plus 2.5% of the annual consolidated turnover above Rs 40,000 crore or Rs 5,000 crore, whichever is lower.
The consultation paper proposals were in sharp contrast to the current materiality threshold of Rs 1,000 crore or 10% of the annual consolidated turnover, whichever is lower. However, once the turnover exceeds Rs 10,000 crore, the absolute materiality threshold of Rs 1000 crore kicks in and remains applicable thereafter irrespective of the turnover of the listed entity.
Interestingly, SEBI had back tested the proposed threshold limits with RPT data for FY24 and FY25 of top 100 listed entities on NSE based on turnover. "... it is observed that the number of material RPTs requiring shareholders’ approval have considerably reduced by approx. 60% thereby facilitating ease for the listed entities," stated the SEBI consultation report.
The regulator had also proposed certain changes in the rules governing the threshold for determining material RPTs undertaken by subsidiaries of a listed entity by bringing in a similar scale-based threshold framework.
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