Sebi to introduce threshold-based framework to determine materiality of related party transactions

Mumbai, Sep 12 (PTI) Market regulator Sebi on Friday decided to introduce a threshold-based framework to determine the materiality of related party transactions (RPTs), based on the annual consolidated turnover of the listed entity.

The Sebi board also approved a proposal to revise thresholds for approval by audit committees for RPTs undertaken by subsidiaries and simplified disclosure requirements for smaller RPTs.

These frameworks are aimed at addressing practical challenges, removing ambiguities, and striking a balance between investor protection and ease of doing business under the Listing Obligations and Disclosure Requirements (LODR) norms, Sebi said in a statement after the conclusion of its board meeting.

Under the approved framework, transactions will be considered material if they exceed 10 per cent of turnover for entities up to Rs 20,000 crore, Rs 2,000 crore plus 5 per cent of turnover above Rs 20,000 crore for firms up to Rs 40,000 crore, and Rs 3,000 crore plus 2.5 per cent of turnover above Rs 40,000 crore (capped at Rs 5,000 crore).

An absolute ceiling of Rs 5,000 crore has been set to protect minority shareholders.

Under the current LODR (Listing Obligations and Disclosure Requirements) norms, a listed entity is required to consider an RPT as material if the transaction, either individually or taken together with previous transactions during a financial year, exceeds Rs 1,000 crore or 10 per cent of the entity's annual consolidated turnover, whichever is lower, as per its last audited financial statements.

Makarand Joshi, founder partner, MMJC and Associates, a corporate compliance firm, said that the introduction of enhanced materiality thresholds, the number of RPT resolutions requiring member approval, will be reduced significantly, aligning regulatory focus on transactions of real substance.

"This is a welcome relief for fast-growing groups and brings particular ease for subsidiaries without lengthy operational records, who now benefit from clearer compliance processes," he said.

Also, the Sebi board approved several changes to ease regulations for Investment Advisors (IAs) and Research Analysts (RAs), as well as a complete revamp of the framework for Registrars to an Issue and Share Transfer Agents (RTAs).

IAs and RAs will now be allowed to share past performance data with clients in a certified format for two years, give second opinions on already distributed assets by charging up to 2.5 per cent annually with client consent, and have extended timelines to corporatise after crossing the Rs 3 crore threshold while continuing to add clients and earn fees during the transition.

Eligibility norms have been relaxed to allow graduates from any stream to register as IAs/RAs after completing the required NISM certifications. The registration process has been simplified by removing the need to submit proof of address, CIBIL reports, net worth statements, or infrastructure details, though basic disclosures and identity proof remain necessary.

On the RTA side, the Sebi board has approved a new framework introducing activity-based regulation, under which only services provided to listed companies will fall under the regulator's purview, while services to unlisted companies would be handled through a separate business unit (SBU) with a disclaimer that it is not Sebi-regulated.

Categorisation of RTAs has been removed, replaced with a single definition, and net worth as well as fee structures have been revised.

Additionally, RTAs are required to establish strong institutional mechanisms, including senior management oversight, surveillance systems, escalation processes, and whistleblower policies to strengthen governance and fraud prevention.

In addition, Sebi approved proposals to make it easier for Accredited Investors (AIs) to invest in Alternative Investment Funds (AIFs) by introducing AI-only schemes with lighter compliance requirements and greater flexibility.

Sebi said that existing AIFs can also opt to become AI-only or Large Value Funds (LVFs) to avail these benefits.

Since AIFs are meant for sophisticated investors, Sebi has decided that accreditation, based on objective criteria, is a better measure of investor capability than high minimum investment thresholds.

To ensure a smooth transition, both the existing system and the new AI-only schemes will run in parallel.

AI-only schemes will enjoy relaxations, such as no limit on the number of investors, exemption from equal treatment across investors, and longer tenure extensions of up to five years.

LVFs, being AI-only by nature, will receive further exemptions, including no need for standardised private placement documents or audits, along with a reduced minimum investment threshold from Rs 70 crore to Rs 25 crore.

Sebi has also eased compliance for entities with listed non-convertible securities by allowing annual reports to be shared through web-links or QR codes instead of physical copies, aligning timelines with the Companies Act to reduce costs and improve efficiency.

The regulator would set up local offices in key state capitals and cities to strengthen its presence, improve investor engagement, and monitor market activities beyond its existing regional offices. PTI AA SP BAL BAL