[Mustafa Rajkotwala is a commercial lawyer based in Mumbai, India]
On 4 August 2025, the Securities and Exchange Board of India (‘SEBI’) released a consultation paper (‘2025 Paper’) proposing a significant overhaul of the framework governing related party transactions (‘RPTs’) under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’). The proposals follow recommendations of the Advisory Committee on Listing Obligations and Disclosure Requirements (‘ACLOD’) and are driven by SEBI’s longstanding objective of curbing RPT abuse as vehicles for conflict of interest, value diversion, and minority shareholder rights erosion.
While the 2021 amendments to the LODR had already expanded who qualifies as a ‘related party’ and tightened materiality thresholds, the 2025 Paper adopts a more measured approach. It aims to balance investor protection with easing compliance burdens on large corporates and mid-cap entities. To this end, it proposes scale-based thresholds for materiality, streamlined disclosure requirements, clearer rules for subsidiary oversight, targeted exemptions, and formalised timelines for omnibus approvals. The key question is whether these efficiency gains can be realised without diluting the safeguards that underpin sound corporate governance.
Materiality Thresholds are Scale-Based
Currently, an RPT is material if it exceeds INR 1,000 crore or 10% of consolidated turnover, whichever is lower. This uniform test, introduced in 2021, has been criticised for imposing disproportionate compliance burdens on large firms, forcing shareholder approvals for routine intra-group deals. SEBI’s 2025 Paper therefore proposes a scale-based approach, under which thresholds rise in proportion to turnover, subject to an upper ceiling of INR 5,000 crore. SEBI back-tested this proposal on the top 100 listed firms and found that material RPTs requiring shareholder votes would reduce by about 60%, confirming that the current one-size-fits-all approach imposes excessive compliance costs.
However, reducing the number of approvals does not guarantee improved system efficiency. There is a risk of reduced vigilance, allowing significant promoter-driven transactions to go unchecked. While the reform certainly makes compliance easier, it also carries the risk of weakening safeguards for minority shareholders. By raising the bar for what counts as ‘material’, there is a danger that transactions deserving closer scrutiny will no longer face the same level of oversight.
The absence of robust aggregation rules may enable promoters to fragment transactions to stay below thresholds. Jurisprudence such as SEBI’s order in Linde India illustrates the dangers of inadequately scrutinised RPTs, where minority shareholders challenged undervalued asset transfers to affiliates. SEBI should consider introducing mandatory independent financial advisor (‘IFA’) reports for large-value RPTs and anti-fragmentation provisions to prevent such circumvention. The INR 5,000 crore cap, though, serves as a safeguard, ensuring that even the largest conglomerates cannot avoid shareholder approval for genuinely material transactions, thereby protecting minority interests.
Commercially, higher thresholds ease legal, valuation, and secretarial costs for large firms, freeing management bandwidth for strategic decisions. Yet, this could create perception risks among foreign institutional investors (‘FIIs’), who may discount promoter-led companies if shareholder protections weaken. Boards may therefore need to offset regulatory relaxation with voluntary disclosures and stronger investor relations practices.
International practices show varied approaches to defining materiality in related party transactions. Singapore links thresholds to net tangible assets, the United Kingdom (UK) applies net-worth based statutory tests, the United States(US) uses fixed-dollar disclosure triggers coupled with board-level oversight, and Australia focuses on arm’s-length assessment and materiality determination by directors without fixed numerical thresholds, requiring member approval unless transactions are deemed to be on reasonable arm’s-length terms. These models reflect different priorities: the US emphasises rigorous investor protection through standardised disclosures, the UK highlights shareholder democracy by tying approvals to net-worth thresholds, Singapore seeks proportionality by calibrating thresholds to net assets, while Australia prioritises substantive evaluation of transaction fairness over mechanical tests. By contrast, SEBI’s reliance solely on turnover appears conservative yet incomplete. Incorporating net tangible asset or sector-specific thresholds could offer a more balanced framework, particularly for non-banking finance companies (‘NBFCs’), trading firms, and banks, where turnover is an imperfect measure and may result in under-scrutiny of asset-heavy or non-operating entities.
Subsidiary Oversight and the Net Worth Test
Currently, RPTs by subsidiaries require parent audit committee approval if they exceed 10% of the subsidiary’s standalone turnover. The 2025 Paper extends this to include transactions material at the group level. For newly incorporated subsidiaries without audited financials, SEBI proposes using a 10% of net worth test, certified by a chartered accountant.
While workable, this is vulnerable to manipulation through temporary net worth inflation. Promoters can exploit capital infusions or accounting adjustments to bypass scrutiny. Genuine effectiveness therefore requires safeguards beyond mere certification, such as periodic audits by independent external firms and mandatory rotation of valuers to prevent regulatory arbitrage. The Ricoh India case showed how financial misstatements erode RPT oversight. SEBI’s 2024 warning to Paytm confirms that breaches of audit committee caps or fragmented disclosures attract regulatory censure. These precedents highlight the risks of weak certification standards. To mitigate this, SEBI should mandate that net worth certifications be subject to audit committee review or undertaken by registered valuers under section 247 of the Companies Act, 2013, to ensure accountability and reduce manipulation risks.
Commercially, this reform will require listed companies to maintain closer alignment with their subsidiaries’ finance teams, adding compliance costs but reducing the scope for promoter-driven value transfers within group structures. For conglomerates, the additional oversight may also raise the need for enterprise-wide data systems capable of tracking RPT exposure across layers of subsidiaries.
Tiered Disclosure for Small and Moderate RPTs
At present, all RPTs above INR 1 crore must be disclosed with detailed information to audit committees and shareholders. This has been criticised as excessive for large firms. SEBI now proposes a tiered framework:
- Small RPTs: Up to INR 1 crore – exempt from disclosure.
- Moderate RPTs: Above INR 1 crore but below the lower of 1% of turnover or INR 10 crore – subject to limited disclosure.
- Material RPTs: Above the threshold – subject to full disclosure and shareholder approval.
While the reform introduces proportionality, it risks ambiguity. Regulation 23(2)(i) of the LODR caps ratification of RPTs at INR 1 crore. Introducing a ‘small RPT’ class up to INR 10 crore could create interpretive confusion and inadvertently expand the scope for post-facto approvals. SEBI must clarify that the INR 1 crore ratification ceiling remains untouched, and that higher brackets only determine disclosure formats.
Further, terms such as ‘redaction of commercial secrets’ should be precisely defined to prevent misuse and withholding of material details. Without clear definition, this exemption can be abused to hide pricing or counterparty terms critical to minority shareholders, as seen in prior enforcement actions.
Business-wise, the tiered approach reduces paperwork but pressures audit committees to detect self-dealing patterns across many moderate-value deals. Companies will need to invest in analytics and internal reporting systems that aggregate deals across time and counterparties to flag potential risks. While reducing compliance burdens, this reform therefore demands more sophisticated monitoring infrastructure.
Omnibus Approval Regime
Currently, omnibus approvals by audit committees are valid for one year. SEBI now proposes harmonisation with shareholder omnibus approvals, which would be valid for up to 15 months if passed at an annual general meeting. While this aligns with Companies Act timelines, it introduces a three-month gap between audit committee and shareholder approvals, potentially weakening oversight.
Extending omnibus approvals to 15 months risks creating regulatory gaps that may be exploited for opportunistic structuring. To close these gaps, SEBI should require rolling annual renewals and continuous oversight by both audit committee and shareholders. To preserve the integrity of tiered governance, SEBI should cap omnibus approval validity at one year across both levels.
For businesses, harmonisation provides predictability, but any gaps in audit committee scrutiny could be commercially risky if promoters use the window to push through transactions without effective board-level monitoring. Aligning approval periods across governance layers would therefore enhance investor confidence and prevent reputational risk.
Exemptions and Clarifications
The consultation paper proposes clarifying certain exemptions. For example, under the proviso (e) of regulation 2(1)(zc) of the LODR regulations currently exempts ‘retail purchases by employees’ from RPT categorisation, which by omission extends to relatives. The paper narrows this by explicitly exempting directors, key managerial personnel, and their relatives, aligning the rule with intent. Similarly, transactions between wholly owned subsidiaries and their parents are clarified to fall outside LODR’s ambit altogether. While reducing regulatory ambiguity, broad exemptions risk enabling hidden remuneration. These should be accompanied by anti-abuse protocols and robust record-keeping.
Commercially, these clarifications reduce grey areas that can create regulatory uncertainty. Clearer exemptions will give companies confidence to structure routine staff benefit schemes without fear of RPT classification, thereby preserving employee goodwill while maintaining governance integrity.
Additional Commercial Implications
SEBI’s RPT overhaul has far-reaching commercial implications beyond compliance savings. Scale-based thresholds may facilitate intra-group restructurings and mergers and acquisitions, but also create risks of asset shifting that minority shareholders may struggle to track. While simplified rules could make India more attractive to global investors, governance-focused funds may respond by demanding additional safeguards or pricing in risk premia. Reduced regulatory scrutiny increases reliance on stronger internal controls, technology, and board vigilance, with independent directors facing greater liability and requiring clearer oversight protocols. Although intra-group synergies may expand, unaffiliated suppliers risk marginalisation, and cross-border companies may encounter dual reporting obligations where foreign regimes are stricter. In the short term, lower costs and faster approvals are evident advantages, but reputational fallout from RPT misuse could outweigh these benefits, particularly in asset-heavy sectors like NBFCs and real estate where turnover is an inadequate proxy. Ultimately, the success of the framework will depend on whether boards proactively adopt stronger voluntary governance, investor engagement, and transparent practices to balance efficiency with long-term trust and value creation.
Conclusion
SEBI’s 2025 Paper represents a deliberate shift towards balancing ease of doing business with investor protection. Scale-based thresholds and tiered disclosures reduce unnecessary red tape, especially for large corporates, while harmonised subsidiary rules and clarified exemptions enhance coherence. Yet, efficiency must not come at the cost of transparency. To secure investor confidence, SEBI must embed safeguards such as IFA reviews for high-value RPTs, anti-fragmentation rules, tighter valuation standards for subsidiaries, and clarity on ratification limits.
From a commercial perspective, these reforms lower compliance costs, reduce boardroom clutter, and align with India’s ease of doing business agenda. However, companies must counterbalance this relaxation with stronger internal systems, investor engagement, and reputational safeguards. If reforms are gamed through fragmentation or opaque disclosures, the commercial costs in terms of litigation, shareholder activism, and valuation discounts may outweigh compliance savings.
As SEBI itself has noted, once fewer transactions automatically trigger review, the onus shifts squarely to boards and audit committees to maintain rigorous oversight of related-party dealings. Legal teams and corporate secretaries should therefore begin reviewing RPT registers, arm’s-length procedures, and disclosure checklists to prepare for the new regime.
The lessons from past governance failures are clear: protecting minority shareholders in a promoter-driven environment requires sceptical enforcement, empirical assessment, and zero tolerance for evasive practices. Ultimately, the success of SEBI’s reforms will depend on whether boards and audit committees rise to the challenge of exercising vigilance in an environment of lighter-touch regulation.
– Mustafa Rajkotwala