Sebi moots major relief for big firms on related party transaction norms

Mint

2 days ago

The Securities and Exchange Board of India (Sebi) on Monday proposed sweeping changes to its related party transaction (RPT) regime, sharpening its focus on ease of doing business for large companies.
The capital markets regulator's consultation paper recommends a significant overhaul of materiality thresholds, potentially cutting compliance hurdles by nearly 60% for the nation's top listed firms.
The consultation paper, released for public comment, sets out a 'scale-based threshold mechanism' to determine when RPTs are considered material and must be placed before shareholders for approval.
Currently, listed companies must seek shareholder approval for any RPT exceeding ₹ 1,000 crore, or 10% of their annual consolidated turnover, whichever is lower.
However, Sebi noted that this was onerous for listed entities with high turnover, as large companies were 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: For companies with up to ₹ 20,000 crore turnover: Threshold remains 10% of annual consolidated turnover.
20,000 crore turnover: Threshold remains 10% of annual consolidated turnover. ₹ 20,001–40,000 crore turnover: Threshold of ₹ 2,000 crore plus 5% of turnover above ₹ 20,000 crore.
20,001–40,000 crore turnover: Threshold of 2,000 crore plus 5% of turnover above 20,000 crore. Above ₹ 40,000 crore turnover: Threshold of ₹ 3,000 crore plus 2.5% of turnover above ₹ 40,000 crore, subject to a maximum of ₹ 5,000 crore.
'The approach of scale-based threshold would ensure that materiality threshold increases with the increase in the turnover of the company leading to an appropriate number of related party transactions being categorized as material thereby reducing the compliance burden of listed entities.' Sebi said.
Testing the new thresholds with recent data, Sebi found the number of material RPTs requiring shareholders' approval has reduced by around 60%.
Sebi also addressed transactions by subsidiaries, proposing that deals above ₹ 1 crore require audit committee approval if they exceed either 10% 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% of net worth or the parent's threshold.
Noting that the ₹ 1 crore exemption from full disclosure requirements is a "minuscule amount for listed entities having high turnover," Sebi proposed that smaller RPTs (up to 1% of turnover or ₹ 10 crore, whichever is lower) need only provide minimal information to the Audit Committee or shareholders.
The consultation paper seeks to formalize that omnibus RPTs approved in an AGM shall be valid up to the date of the next AGM for a period not exceeding 15 months. For other shareholder meetings, the approval remains valid for one year.
It proposed that exemptions on retail purchases will apply only to directors or key managerial personnel of a listed entity or its subsidiary (or their relatives). It also clarified that exemptions for transactions between holding companies and subsidiaries are intended for listed holding companies only.
Sebi has sought public comments on these proposals by August 25, 2025.
Legal experts said the challenge will be to balance efficiency with sufficient rigour, ensuring that the compliance reset does not dilute minority rights or open new avenues for opacity in related party dealings.
Ashima Obhan, senior partner at Obhan & Associates, welcomed the nuanced shift, noting that Sebi's move towards scale-based thresholds for material RPTs reflected a nuanced recognition of the varied compliance capacities of listed entities.
"While easing procedural burdens for larger corporations may enhance operational agility, it is crucial that such relaxation does not dilute the protection framework for minority shareholders.'
Obhan said scaled thresholds require careful calibration to ensure truly significant deals face scrutiny, and that reduced disclosures for small-value transactions should be coupled with safeguards like periodic aggregative disclosures or triggers, to maintain transparency without overburdening companies.
Echoing the sentiment, Hardeep Sachdeva, senior partner at AZB & Partners, said that for large listed entities, the higher thresholds could reduce procedural friction. "But it is imperative that shareholder protection, particularly for minority investors, remains uncompromised."
Sachdeva underscored the need to avoid fragmentation of RPTs into small tranches that slip through oversight. "While fewer transactions may cross materiality thresholds, the responsibility to ensure fairness and arm's length dealing will only grow, demanding greater diligence and internal coordination.'
With potentially fewer transactions being escalated by default, audit committees will need robust internal mechanisms to proactively assess the commercial rationale and fairness of intra-group dealings, she said, adding that enhanced reliance on internal controls, independent evaluations, and data analytics may become essential to fulfill their fiduciary mandate.
The reforms, if adopted, could mark a significant shift in the compliance of related party transaction norms, promising greater flexibility for India's most prominent corporates. But the onus will remain on the companies' boards and committees to maintain rigorous oversight.