Brief Overview:
A turnover-based compliance framework for materiality thresholds in related party transactions and subsidiary-level approvals has been proposed by the Securities and Exchange Board of India vide a consultation paper. The consultation aims to address concerns raised by industry regarding unnecessary compliance burden, while ensuring that investor protection and governance oversight are being preserved.
Technical Details:
A brief overview of the proposed amendments are provided below:
1) Introduction of a scale-based materiality threshold: Materiality for RPTs is proposed to be determined based on the listed entity’s annual consolidated turnover as against the current requirement of transaction exceeding ₹1,000 crore or 10% of the company’s annual consolidated turnover, which is lower, during a financial year.
(a) For entities with turnover up to ₹20,000 crore: 10% of annual consolidated turnover.
(b) For entities with turnover between ₹20,001 crore and ₹40,000 crore: ₹2,000 crore plus 5% of the of the annual consolidated turnover.
(c) For entities with turnover exceeding ₹40,000 crore: ₹3,000 crore plus 2.5% of the annual consolidated turnover Rs. 5,000 Crore, whichever is lower.
2) Subsidiary transactions:
(a) RPTs by subsidiaries exceeding ₹1 crore, where listed entity is not a party, will require audit committee approval if value exceeds the lower of: (A) 10% of subsidiary’s standalone turnover as per latest audited financials, and (B) Materiality threshold applicable to the listed entity under the scale-based threshold model.
(b) RPTs by subsidiaries exceeding ₹1 crore, which do not have financial statements for at least one year, the threshold will be calculated on the basis of 10% of the standalone net worth, which shall be certified by a chartered accountant.
(c) In case the net worth is negative, then the threshold will be calculated on the basis of the aggregate of paid-up capital and securities premium.
3) Validity of omnibus approvals:
(a) Approvals vide an Annual General Meeting (“AGM”) will remain valid up to the date of next AGM for a period not exceeding 15 months.
(b) Approvals through other general meetings will be valid for a period of 1 year.
JC Takeaway:
SEBI’s consultation paper marks a significant shift towards a more risk-based and balanced regulatory framework for RPTs. The introduction of scale-based thresholds aligns Indian practices more closely with global practices and international standards, aiming to ease compliance without compromising on governance safeguards such as audit committee oversight and shareholder approvals. While the proposals reflect responsiveness to industry concerns, enforcement of some of the proposed thresholds may be challenging due to complex calculations.
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