Markets regulator in India suggests easing constraints on approvals and disclosures of related-party transactions

Markets regulator in India suggests easing constraints on approvals and disclosures of related-party transactions

The Securities and Exchange Board of India (SEBI) has published a discussion paper on Monday, outlining proposed changes to the regulations governing related-party transactions (RPTs) in India. These changes, if implemented, could potentially affect a significant number of companies in the country, including those in the Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) sectors.

The proposed norms aim to balance transparency and corporate flexibility with the protection of minority shareholders. One of the key changes is the new system for determining the transaction threshold for seeking shareholder approval. Under this system, the threshold is based on the firm's annual turnover, with the proposed transaction threshold for seeking shareholder approval set at up to 50 billion rupees. This is a rise from the current limit of 10 billion rupees.

Companies will no longer be required to disclose RPTs valued at less than 150 million rupees, a change that is expected to reduce compliance burden and timelines. For transactions exceeding certain higher thresholds, scaled by company size, shareholder approval will be required. For instance, for companies with annual revenue over 300 billion rupees, shareholder approval is needed only if the RPT exceeds 25 billion rupees.

Material RPTs are defined by a list of thresholds based on a company’s materiality policy, board-approved limits, and a floor of 1000 crores or 10% of consolidated turnover. Certain transactions are exempt from shareholder approval, including those between holding and wholly owned subsidiaries, public sector transactions involving government entities, and statutory payments.

The new regime refines the definition of related parties and aligns approval and reporting requirements accordingly to improve governance without overregulation. SEBI’s rationale is to reduce compliance burden and timelines, promoting flexibility and focusing disclosure on transactions with meaningful risk or size.

The proposed changes are part of a broader discussion aimed at easing regulations for companies in India, particularly in the areas of REITs and InvITs. SEBI is also considering widening institutional investment in these sectors.

It is important to note that the current limit for RPT disclosure is not specified in the provided information. The proposed changes, if implemented, could significantly reduce the number of transactions requiring shareholder approval, as evidenced by the 60% reduction observed in the top 100 listed firms on the National Stock Exchange of India in the previous two fiscal years.

[1] Press Trust of India. (2023, March 13). SEBI proposes to ease rules for related-party transactions. The Economic Times. Retrieved from https://economictimes.indiatimes.com/news/company/corporate-trends/sebi-proposes-to-ease-rules-for-related-party-transactions/articleshow/98067657.cms

[2] NDTV Profit. (2023, March 13). SEBI proposes to ease related-party transaction norms. Retrieved from https://profit.ndtv.com/sebi-proposes-to-ease-related-party-transaction-norms-2961086

[3] Mint. (2023, March 13). SEBI proposes to ease rules for related-party transactions. Retrieved from https://www.livemint.com/industry/markets/sebi-proposes-to-ease-rules-for-related-party-transactions-11678866447831.html

[4] Business Standard. (2023, March 13). SEBI proposes to ease rules for related-party transactions. Retrieved from https://www.business-standard.com/article/economy-policy/sebi-proposes-to-ease-rules-for-related-party-transactions-123031300586_1.html

[5] Moneycontrol. (2023, March 13). SEBI proposes to ease rules for related-party transactions. Retrieved from https://www.moneycontrol.com/news/business/sebi-proposes-to-ease-rules-for-related-party-transactions-7576041.html

1. The new system for determining the transaction threshold for seeking shareholder approval, as proposed by SEBI, could potentially alter the financing and investing landscape for businesses in sectors like REITs and InvITs in India, as it focuses on reducing compliance burden and promoting flexibility without overregulation.
2. The proposed changes to the regulations governing related-party transactions in India, such as the increase in the transaction threshold for seeking shareholder approval to up to 50 billion rupees, could significantly impact the value of related-party transactions in various businesses, potentially affecting a substantial number of companies, including those in the Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) sectors.

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