Blitz Bureau
The Securities and Exchange Board (Sebi) has proposed a sweeping overhaul of the norms dealing with related-party transactions (RPTs) as part of its focus on increasing the ease of doing business for large companies.
The Board has released its draft consultation paper which has called for sweeping changes in the norms dealing with materiality thresholds, potentially cutting compliance hurdles by nearly 60 per cent for the top listed firms. Currently any RPT of Rs 1,000 crore or more or 10 per cent of their annual consolidated turnover, by a listed company must seek shareholder approval.
The proposed scale-based thresholds aim to slash red tape for large listed entities, but experts urge safeguards for minority shareholders and the consultation paper recommends a significant overhaul of materiality thresholds.
The proposed “scale-based threshold mechanism” seeks to determine when RPTs are considered material and must be placed before shareholders for approval. However, Sebi now thinks that this is onerous for large listed entities as large companies are forced to classify many substantial—but not necessarily significant—transactions as material, leading to excessive paperwork.
To address this, Sebi has proposed replacing the “one-size fits all” approach with a scale-based system, as follows:
For companies with up to Rs 20,000 crore turnover, the threshold remains 10 per cent of annual consolidated turnover;
For those with Rs 20,001–40,000 crore turnover, the threshold of Rs 2,000 crore plus 5 per cent of turnover above Rs 20,000 crore;
For those with over Rs 40,000 crore turnover, the threshold proposed is Rs 3,000 crore plus 2.5 per cent of turnover above Rs 40,000 crore, subject to a maximum of Rs 5,000 crore.
“The approach of scale-based threshold would ensure that materiality threshold increases with the increase in the turnover, leading to an appropriate number of RTPs being categorized as material thereby reducing the compliance burden,” the Sebi paper states. A Sebi analysis of the thresholds with recent data, has found the number of material RPTs requiring shareholders approval has come down by around 60 per cent.
Addressing transactions by subsidiaries, Sebi proposes deals above Rs 1 crore require audit committee approval if they exceed either 10 per cent of the subsidiary’s turnover or the new scale-based threshold for the parent, whichever is lower.
For subsidiaries without full-year financials, the comparison would be to 10 per cent of net worth or the parent’s threshold. Noting that the Rs 1 crore exemption from full disclosure requirements is a “minuscule amount for listed entities having high turnover,” Sebi proposes that smaller RPTs (up to 1 per cent of turnover or Rs 10 crore) need to only provide minimal information to the audit committee or shareholders.
The consultation paper also seeks to formalise that omnibus RPTs approved in an AGM shall be valid up to the date of the next AGM but a period not exceeding 15 months. For other shareholder meetings, the approval remains valid for a year. Similarly, exemptions on retail purchases will apply only to directors or key managerial personnel of a listed entity or its subsidiary or their relatives. The regulator has sought public comments on these proposals by August 25.