SEBI's proposed RPT rules ease compliance but increased vigilance needed as firms could structure smaller deals to bypass thresholds: Experts

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The capital market regulator’s proposals for amending the rules governing disclosure of related-party transactions or RPTs have been largely welcomed by industry though experts add that the watchdog should be vigilant against companies structuring smaller RPTs to avoid the proposed thresholds.

On Monday, the Securities and Exchange Board of India (SEBI) released a consultation paper proposing to move towards a scale-based threshold mechanism for identifying material RPTs instead of the current threshold of Rs 1,000 crore or 10 percent of the annual consolidated turnover, whichever is lower.

“Creating a turnover-based tiered threshold for RPT disclosures will simplify governance compliance and decrease paperwork for listed companies with lower turnover. Additionally, implementing a scale-based threshold for RPTs between a listed company and its subsidiaries will reduce compliance efforts and speed up business transactions among group entities,” said Sidharth S Kumar, senior associate at Mumbai-headquartered law firm BTG Advaya.

“The most notable change is the proposal to raise the threshold for providing minimum information to the audit committees. This aligns with industry requests to increase the current Rs 1 crore minimum limit. It will also help audit committees focus on key information during decision-making and improve compliance safeguards for all stakeholders,” he added.

SEBI has proposed a threshold of 10 percent of the annual consolidated turnover of the listed entity if the consolidated turnover of the firm is up to Rs 20,000 crore.

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 percent of annual consolidated turnover of the listed entity above Rs 20,000 crore.

For entities with a consolidated turnover of more than Rs 40,000 crore, the threshold has been suggested as Rs 3,000 crore plus 2.5 percent of the annual consolidated turnover above Rs 40,000 crore or Rs 5,000 crore, whichever is lower.

“These amendments in the RPT thresholds seem well calibrated, as it may require fewer RPTs needing approvals,” said Rajiv Bhutani, partner, transfer pricing, tax and regulatory services, BDO India.

“While it definitely eases the compliance burden of large companies, one needs to be vigilant on companies using this flexibility to structure multiple smaller transactions to bypass the thresholds," he added.

In a similar context, Sudhir Bassi, executive director at law firm Khaitan & Co., said that the regulatory framework for RPTs had become too detailed, cumbersome and had a one-size-fits-all approach, and that the proposals show that SEBI is trying to find a balance between investor protection and ease of doing business.

“This graded approach is a welcome step as it will reduce the compliance burden on listed entities and at the same point of time provide information keeping in mind the materiality of the transaction and the size of the company. The audit committees will have more time to focus on larger transactions rather than processing large amounts of data for smaller RPTs. Overall, SEBI has tried to find a balance between ease of doing business and investor protection,” said Bassi.

Interestingly, SEBI back-tested the proposed threshold limits with RPT data for FY24 and FY25 of the top 100 listed entities on the National Stock Exchange 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 data-driven back-testing presented in the paper shows a 60 percent reduction in RPTs requiring shareholder approval under the new thresholds, without diluting shareholder protection—enabling companies to focus more on their business operations without compromising on investor protection or transparency,” said Makarand M Joshi, founder partner, MMJC & Associates, a company secretary firm in Mumbai.

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