Sebi introduces a threshold-based framework to determine the materiality of related party transactions

Markets regulator Sebi has introduced a threshold-based framework to determine the materiality of related party transactions (RPTs), based on the annual consolidated turnover of the listed entity.The regulator also revised the thresholds for audit committee approval for RPTs conducted by subsidiaries and simplified disclosure requirements for smaller related party transactions.

These new standards aim to address practical challenges, remove ambiguities and strike a balance between investor protection and ease of doing business under the Listing Requirements and Disclosure Requirements (LODR) standards.Under the new norms, for entities with turnover up to Rs 20,000 crore, a transaction will be considered material if it is more than 10 per cent of annual consolidated turnover, Sebi said in a November 18 notification.

In case of entities with turnover between Rs 20,001 crore and Rs 40,000 crore, the threshold would be Rs 2,000 crore plus 5 per cent of turnover exceeding Rs 20,000 crore.

For entities with turnover exceeding Rs 40,000 crore, the threshold will be Rs 3,000 crore plus 2.5 per cent of turnover exceeding Rs 40,000 crore, or Rs 5,000 crore, whichever is lower. To protect the interests of minority shareholders, an absolute threshold of Rs 5,000 crore has been notified as an upper limit for listed entities with a turnover above Previously, under the LODR norms, a listed entity had to consider an RPT as material if the transaction, individually or together with previous transactions during a financial year, exceeded Rs 1,000 crore or 10 percent of the entity’s annual consolidated turnover, whichever is lower, as per the last audited financial statements.

The new norms came after stakeholders pointed out that the absolute materiality threshold of Rs 1,000 crore promotes a ‘one-size-fits-all’ approach as all listed entities are treated the same, irrespective of their turnover, operational scale or business model.

Apart from the materiality threshold, Sebi has relaxed the minimum information to be provided to the audit committee and shareholders for RPT approvals.

Under this, if the aggregate value of RPTs with a related party in a financial year (including ratified transactions) does not exceed 1 percent of the annual consolidated turnover of the listed entity or Rs 10 crore, whichever is lower, a simplified set of disclosures would be submitted for approval.

This reduced information requirement will be less detailed than what is required under current industry standards.

Further, Sebi said, “Omnibus approval granted by the shareholders for material related party transactions at an annual general meeting will be valid till the date of the next annual general meeting (AGM)”.

“In the case of omnibus approvals for material related party transactions granted by shareholders at general meetings other than the General Meeting of Shareholders, the validity of such omnibus approvals shall not exceed one year from the date of such approval,” it added. PTI