Compliance Reform: SEBI Adjusts Related Party Transaction Rules with Turnover-Linked Thresholds
Markets regulator Sebi has announced a significant overhaul of its framework for defining material related party transactions (RPTs), moving away from a fixed cap approach to a more flexible turnover-linked model. This change aims to eliminate ambiguities and enhance compliance with the Listing Obligations and Disclosure Requirements (LODR) norms. The new guidelines, effective from November 18, also revise audit committee approval thresholds and simplify disclosure requirements for smaller transactions, striking a balance between investor protection and business efficiency.
New Turnover-Linked Framework
Under the revised framework, companies with an annual consolidated turnover of up to Rs 20,000 crore will classify a transaction as material if it exceeds 10 percent of their turnover. For those with a turnover between Rs 20,001 crore and Rs 40,000 crore, the threshold is set at Rs 2,000 crore plus 5 percent of the turnover above Rs 20,000 crore. Companies exceeding Rs 40,000 crore in turnover will trigger materiality at Rs 3,000 crore plus 2.5 percent of turnover above that threshold, or a maximum of Rs 5,000 crore, whichever is lower. This new structure aims to address concerns that the previous uniform threshold of Rs 1,000 crore did not adequately reflect the operational scale and business models of different companies.
Revised Approval and Disclosure Requirements
In addition to the new materiality thresholds, Sebi has revised the approval process for RPTs executed by subsidiaries. The regulator has eased the minimum information disclosures required for audit committee and shareholder approvals. If total RPTs with a related party do not exceed 1 percent of annual consolidated turnover or Rs 10 crore, a simplified disclosure format may be utilized. This reduced disclosure will be less detailed than current industry standards, thereby alleviating compliance burdens for smaller transactions.
Clarifications on Omnibus Approvals
Sebi has also clarified the validity of omnibus approvals, which are granted during annual general meetings (AGMs). These approvals will remain valid until the next AGM, while those approved at other types of general meetings will be valid for up to one year from the date of approval. This clarification aims to provide companies with greater certainty regarding the duration of approvals, thereby facilitating smoother operations.
Balancing Investor Protection and Business Efficiency
The changes introduced by Sebi reflect a concerted effort to balance the need for investor protection with the operational realities faced by companies. By moving away from a rigid, one-size-fits-all approach, the regulator aims to create a more adaptable framework that considers the diverse nature of businesses. This initiative is expected to enhance compliance while addressing the concerns raised by stakeholders regarding the previous thresholds. Overall, these reforms are designed to foster a more conducive environment for business operations while safeguarding the interests of minority shareholders.
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