Materiality Or Mirage? Rethinking SEBI’s Reforms on Related Party Transactions

[Srijan and Tamanna are students at National Law University Odisha.]

There are only a few areas of corporate governance which reflect the conflict between ease of doing business and protection of investors’ rights as distinctly as related party transactions (RPT). An RPT is an arrangement between a listed company and the entities with which the company shares a pre-existing relationship, such as controlling shareholders, promoters, subsidiaries, or key managerial personnel.   

Although RPTs can be commercially beneficial, they may also act as a source for tunnelling, i.e., the diversion of assets and value away from the minority shareholders. India’s answer to this challenge has been the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (SEBI LODR), which is often criticized as both too rigid and under-protective.  

To counter this, on 4 August 2025, SEBI issued a consultation paper seeking to balance this by easing compliance where there is rigidity and placing stricter oversight norms where risks exist. In this article, the authors critically analyze the current framework and proposed changes under SEBI LODR in detail while also deciphering the loopholes of the proposal.   

The Current Framework    

Under Regulation 23(1) of the SEBI LODR, an RPT transaction is deemed to be material if it is higher than INR 1,000 crores or it is 10% of the company's turnover, whichever is lower. If a transaction is deemed to be an RPT, it needs to be approved by the Audit Committee and the shareholders through a special resolution, in which the concerned party is excluded from voting. The intent behind this is to ensure that transactions that have a conflict of interest should undergo an independent assessment.    

However, various challenges have been encountered in the application of this framework. The benchmark for materiality under this framework is very low for the Indian market, as for many businesses, INR 1,000 crore is not even 1% of their turnover, but they still need to follow strict disclosure norms. This leads to the shareholder meetings and the audit committee being overburdened with transaction approvals, which are not even material in the context of the company. Another loophole in the present framework is that a transaction by a subsidiary is only tested for materiality against the subsidiary’s turnover, through this large group transactions can bypass the scrutiny at the holding company’s level.   

The Proposed Changes    

In the consultation paper, most significant change proposed is a shift to a scale-based threshold to determine materiality. Under the proposed framework, rather than having a fixed threshold, the threshold increases with increases in the turnover of a company. The threshold for companies with a turnover of less than INR 20,000 crores will be 10% of the turnover. When a company’s turnover is higher than INR 20,000 crores but less than INR 40,000 crores, the threshold will be 2000 crores plus 5 per cent of the turnover above INR 20,000 crores. For the companies with a turnover higher than INR 40,000 crores, the threshold is INR 3,000 crores plus 2.5% of turnover above INR 40,000 or INR 5,000 crores, whichever is lower.   

With regard to subsidiaries, SEBI has proposed that a transaction undertaken by a subsidiary that is higher than 10% of the standalone turnover (net worth for companies incorporated within a year) or the threshold of the holding company, will require the approval of the holding company’s audit committee. The addition of scrutiny by the parent audit committee would prevent parties from structuring transactions through subsidiaries with higher turnover to prevent oversight.   

Furthermore, SEBI also aims to reduce disclosure requirements.  Through the circular dated 26 June 2025, SEBI has exempted transactions below INR 1 crore from disclosures. It is now proposed that transactions which are less than 10 crore or below 1% of turnover, whichever is lower, will have to comply with an even lower standard of disclosures, specified under Annexure 2 of the consultation paper.  

Moreover, it is proposed that the omnibus approvals will be valid till the next annual general meeting, with a maximum time limit of 15 months. This aligns the provisions of the SEBI LODR with the Companies Act 2013. The consultation paper also elucidates that omnibus approvals must be specific; it restricts blanket approvals, which undermines oversight.    

At last, SEBI has proposed to narrow the scope of retail purchase exemptions.  Now it is limited to directors, key managerial persons, and their relatives, excluding employees.  Also, the exemption in case of a holding company and its wholly owned subsidiary will only apply when the holding company itself is a listed company.    

Analysis of the Proposals  

Although the consultation paper is a step forward in RPT regulations, there are various issues that remain unaddressed. The most widely criticized is SEBI’s reliance on turnover as the metric for determining materiality. While on the surface, turnover appears to be an objective benchmark, it is a flawed yardstick for governance risk. Turnover reflects the volume of sales and not the profitability, net worth or the actual impact on shareholders. In various industries such as oil marketing or retail, a company with a very high turnover might also have thin margins. In companies like these, even a transaction that is relatively small in terms of sales might affect profitability or cash flows significantly. On the other hand, companies that do not have many physical assets and modest turnovers, such as consulting firms, may have to face excessive compliance burdens for routine transactions.   

Furthermore, this flaw of considering turnover as the benchmark becomes even more apparent in the context of the proposed INR 5,000 crore ceiling. A conglomerate may enter into a INR 5,000-crore transaction without following strict compliance, notwithstanding the fact that the transaction may be capable of materially altering the debt, earnings or the ownership patterns of the company. Furthermore, SEBI’s proposal to base threshold on turnover fails to capture RPTs related to balance sheets, such as borrowings, investments, asset transfers, etc. Although these transactions do not affect the revenue of the company, they can significantly alter the financial position of a company. By basing its thresholds simply on revenue, SEBI risks excluding these critical transactions from its definition of ‘materiality’.    

The minority shareholders are not impacted by the percentage value of a transaction; they are impacted by the actual effect that the transaction has on dividends, capital or value. Furthermore, India’s sectoral diversity makes turnover an even weaker benchmark. While high volume trading firms may generate revenues many times over their asset base each year, a bank’s turnover is mostly interest income, which is usually a small fraction of its assets.  Hence, this makes widely distorted thresholds across industries.  

Another criticism is related to the relaxation of disclosure norms for small-value transactions. While well-intentioned to ease compliance burdens, this reform opens the door to misuse where a company could deliberately fragment a large deal into multiple small transactions and avoid scrutiny by keeping each small transaction below the threshold for disclosure. Hence, in the absence of a rule that mandates aggregation of related transactions, this reform could undermine transparency. In addition, the tiered disclosure formats reduce compliance to a mere box-ticking exercise. RPTs require nuanced evaluation, but this template-based process may limit the audit companies from exercising their discretion. Hence, this reform limits governance to form rather than substance, diluting transparency and eroding accountability.    

The reforms proposed for subsidiaries do counter significant loopholes however, the effectiveness is dependent on implementation. The reliance on net worth as a metric for new subsidiaries can lead to new loopholes as the net worth can be inflated through capital infusion, which makes net worth too volatile to be a reliable metric.  In multi-level conglomerates, an effective mechanism should be established in order to ensure the timely and accurate flow of information to the parent audit committee. In the absence of such safeguards, oversight is only an illusion rather than a reality.    

The Path Forward   

The proposed changes in the consultation paper signify recognition of concerns. Through these changes, SEBI has recognized the need for reducing compliance, and has tried to achieve it by recalibrating thresholds, reducing disclosure requirements and clearing ambiguities around omnibus approvals and exceptions. The consultation paper is also aimed at filling the loopholes in subsidiary oversight. These changes are a progress towards a framework with a better balance between commercial interests and protection.   

However, the proposal needs certain refinements in order to achieve the overarching aim of better protection with lesser compliance. First, the threshold for materiality should incorporate other indicators like profitability and net worth for a better assessment of risk. Moreover, the INR 5,000-crore ceiling itself requires reconsideration, as transactions of such magnitude should not escape scrutiny merely because they appear small in relative terms. A test that can combine the percentage value of the transaction with the real size would provide better protection.   

Furthermore, there is a risk of parties breaking huge transactions into multiple smaller ones to avoid scrutiny. To counter this, a rule of assessment of aggregate transactions within a financial year should be incorporated. The oversight over subsidies also needs to be strengthened, audit committees must not just act as a rubber stamp but should have powers to conduct independent assessments.   

To conclude, the consultation paper shifts the regulations from a rigid uniformity towards proportional oversight. However, there is scope for improvement, like hybrid thresholds, absolute value safeguards, anti-avoidance safeguards and better subsidiary oversight. These enhancements would not only be easy to comply with but would also enhance investor protection and corporate accountability. A well-functioning market stands on pillars of compliance, efficiency and investor confidence.