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SEBI revises materiality threshold for payments relating to brand or royalty

SEBI revises materiality threshold for payments

Regulation 23(1A) of the Securities Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) specifies that the payments made by the listed entities to related parties with respect to brand usage/royalty amounting to more than two per cent of consolidated turnover of the listed entity would be considered material. 

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Background
Regulation 23(1A) of the Securities Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) specifies that the payments made by the listed entities to related parties with respect to brand usage/royalty amounting to more than two per cent of consolidated turnover of the listed entity would be considered material. Such transactions would require shareholders’ approval on a majority of minority basis i.e. none of the related parties have a right to vote to approve such resolutions. These regulations were to be made effective 1 April 2019.

Based on the representations received from the stakeholders, SEBI in its board meeting dated 27 March 2019 decided to defer the implementation of the amended regulation pertaining to royalty or brand usage payments by three months i.e. upto 30 June 2019.

New development
Recently, SEBI in its meeting dated 27 June 2019, has decided that payments made to related parties towards brand usage or royalty may be considered material if the transaction(s) exceed five per cent of the annual consolidated turnover of the listed entity during a financial year and would require approval of the shareholders, with no related party having a vote to approve such resolutions.

Our comments
In India, there are a large number of companies that make payments relating to brand usage or royalty to related parties. Representations were made by various stakeholders to SEBI that low materiality threshold of two per cent for shareholders' approvals is likely to affect genuine transactions even though the objective behind these shareholders' approvals is to safeguard interests of public shareholders against any abuse through such related party transactions.

The recent decision of SEBI to revise the materiality threshold to five per cent is in line with the Kotak Committee recommendation. Prior to this amendment SEBI had modified this recommendation by reducing the threshold of brand and royalty payment from five to two per cent. As many companies made representation to SEBI regarding the threshold percentage, SEBI has decided to adopt the five per cent threshold as was originally recommended by the Kotak Committee.

These brand, royalty, technology supply or similar arrangements may be quite integral and essential to a company’s business. Therefore, it is important for these companies to engage proactively with their shareholders and also make adequate disclosures on the value that the entity derives from a brand or technology or other knowhow for which it has agreed to pay brand, royalty or technical fees to the parent entity or promoter group. This is likely to help the shareholders take a well informed decision when they cast their vote on these transactions.

To access the text of the SEBI press release, please click here.
 

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