With a renewed emphasis on making it easier for big businesses to conduct business, the Securities and Exchange Board of India (SEBI) on 7 August recommended significant modifications to its related party transaction (RPT) system.
A substantial revision of materiality requirements is suggested in the capital markets regulator’s consultation paper, which could reduce compliance barriers for the country’s leading listed companies by about 60%.
Why SEBI’s Proposed RPT Changes Matter for Big Firms?
A “scale-based threshold mechanism” is outlined in the consultation document, which is open for public comment, to decide whether RPTs are deemed material and need to be presented to shareholders for approval. For any RPT above INR 1,000 crore, or 10% of their yearly consolidated turnover, whichever is less, listed businesses are currently required to obtain shareholder approval.
SEBI pointed out that this was burdensome for listed organisations with high turnover because it made big businesses designate a lot of large transactions that weren’t really significant as material, which resulted in a lot of paperwork.
How the New Scale-Based Threshold System Works
SEBI has suggested using a scale-based method in place of the “one-size-fits-all” strategy in order to address this. 10% of yearly consolidated turnover is still the barrier for businesses with a turnover of up to INR 20,000 crore. The barrier, however, is INR 2,000 crore + 5% of turnover exceeding INR 20,000 crore for enterprises with a turnover of INR 20,001–40,000 crore.
Additionally, a threshold of INR 3,000 crore + 2.5% of turnover beyond INR 40,000 crore, up to a maximum of INR 5,000 crore, applies to enterprises with a turnover of more than INR 40,000 crore.
According to SEBI, the scale-based threshold approach would guarantee that the threshold for materiality rises in tandem with the company’s turnover, resulting in a suitable number of related party transactions being classified as material and lowering the burden of compliance for listed entities.
Impact: 60% Reduction in Material RPT Approvals
When SEBI tested the new limits using recent data, it discovered that there were almost 60% fewer substantial RPTs that needed shareholder approval. SEBI addressed subsidiary transactions as well, suggesting that transactions exceeding INR 1 crore need audit committee clearance if they surpass either the new scale-based threshold for the parent company or 10% of the subsidiary’s turnover, “whichever is lower”.
What This Means for Listed Companies and Subsidiaries
10% of net worth or the parent company’s criteria would be used as a comparator for subsidiaries without full-year financials.” Noting that the INR 1 crore exemption from full disclosure requirements is a “minuscule amount for listed entities having high turnover,” Sebi suggested that smaller RPTs only have to give the Audit Committee or shareholders the bare minimum of information, up to 1% of turnover or INR 10 crore, whichever is less.
SEBI Consultation Paper: Key Dates and Deadlines
The consultation document aims to formally state that omnibus RPTs passed at an AGM will remain in effect for a maximum of 15 months, until the next AGM. The approval is good for another year for other shareholder meetings. It was suggested that directors or other key management staff of a listed company or its subsidiary (or their family members) would be the only ones eligible for exemptions from retail purchases.
Additionally, it made clear that listed holding companies are the only ones eligible for exemptions from transactions between holding companies and subsidiaries. SEBI has set a deadline of August 25, 2025, for public feedback on these suggestions. The difficulty, according to legal experts, will be striking a balance between efficiency and adequate rigour, making sure that the compliance reset doesn’t weaken minority rights or create new opportunities for related party dealings to be opaque.
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