SEBI mulls overhaul of rules governing disclosure of Related Party Transactions; plans scale-based threshold limits

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The Securities and Exchange Board of India (SEBI) plans to review 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.

“… 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,” stated the consultation paper issued by SEBI on Monday.

“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,” it added.

The capital market regulator has 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 has 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 has been suggested as 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.

This is 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.

"In order to protect the interest of minority shareholders, an absolute threshold of Rs. 5000 Crore as upper ceiling has also been proposed for the listed entities having turnover above Rs. 40,000 Crore," stated the SEBI paper.

Interestingly, SEBI 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 has 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.

Further, SEBI has also proposed relaxing the minimum information to be furnished to the Audit Committee and Shareholders for the approval of related party transactions.