SEBI’S Disclosure Wall has a Door: The Section 230 Problem

[Samridh and Aviral are students at the National Law Institute University Bhopal.]

The SAT’s ruling in Linde India (December 2025) reignited the debate over SEBI’s related party transaction (RPT) norms. That debate, though legitimate, risks missing a more consequential dynamic. While critics argue that Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations) is commercially unworkable, the more telling market response is not lobbying for relaxation; it is jurisdictional calibration. Sophisticated corporate groups have identified Section 230 of the Companies Act 2013 as a route along which the most protective elements of SEBI’s disclosure architecture do not apply with equal force, or may not be triggered in the same manner.

A Section 230 scheme involving a listed entity does not operate as a clean exit from SEBI’s oversight. The stock exchange no-objection process and Annexure I certification continue to apply, and Regulation 23 compliance remains a formal condition of SEBI’s approval. What changes is the substantive content of protection. The Part C disclosures which require real-time financial distress markers of the promoter counterparty to be placed before institutional investors before any vote is taken, and the unconditional majority of minority (MoM) requirement under LODR Regulations which fully disenfranchises related parties, are protections tied to thresholds that a scheme can be structured to stay below. The route also carries independent commercial logic: a demerger under Section 230 can qualify for tax neutrality under Sections 2(35) and 70 of the Income Tax Act 2025 (erstwhile Sections 2(19AA) and 47(vii) of the Income Tax Act 1961) in a way a business transfer agreement typically cannot, and judicial sanction by the NCLT limits the scope for external scrutiny of valuation methodology compared to the pre-vote contestation seen in MoM-driven RPT approvals. Section 230 is not simply a detour around the RPT framework. In specific configurations, it is a commercially rational alternative that produces outcomes the framework was designed to prevent.

The mechanism is straightforward. A material asset transfer executed as a business transfer agreement between a listed company and a promoter entity triggers the full force of LODR Regulation 23: independent director scrutiny, Part C disclosure requirements, and an MoM vote in which the promoter is entirely disenfranchised. The same economic transfer, repackaged as a demerger under Section 230 and placed before the NCLT, is governed instead by Rule 6 of the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 (CAA Rules). That framework was designed for general corporate reorganisations, not for managing conflicts of interest between listed companies and their controlling shareholders. The gap between these two regimes is not incidental. It may create a structural arbitrage opportunity that can be strategically utilised.

SEBI’s 2025 Disclosure Architecture

The ISF’s revised RPT Industry Standards, effective 1 September 2025, replaced a regime that was narrative-driven and susceptible to management spin. The standards are structured in three parts. Parts A and B address relationship mapping and fund-use justifications. The consequential element is Part C, reserved for material RPTs. It requires disclosure of real-time financial distress markers of the promoter counterparty: default history over the past three years, NPA classification, wilful defaulter status under RBI guidelines, and disqualification under Section 29A of the Insolvency and Bankruptcy Code 2016 (IBC). For a promoter attempting to consolidate a financially stretched group entity into the listed company’s balance sheet, Part C makes the bailout visible to institutional investors and proxy advisory firms before the vote is taken.

The LODR (Fifth Amendment) Regulations, notified on 18 November 2025, compounded this by replacing the absolute INR 1,000 crore threshold with a tiered structure tied to consolidated turnover. Any significant intra-group restructuring now almost inevitably triggers Part C. An honest disclosure involving a financially distressed related party is, in practice, politically difficult to survive at a MoM vote. That pressure creates a structural incentive for promoters to consider whether the scheme route offers a more navigable path.

What Rule 6 Does Not Require

Form CAA-2 under Rule 6 of the CAA Rules is designed to tell members what a scheme proposes and how it affects their holdings. It was never designed as a conflict-of-interest disclosure instrument. Rule 6(3)(viii) mandates disclosure of pending investigations, but only under the Companies Act 2013; it says nothing about NPA status, RBI default classifications, or IBC disqualifications. A promoter whose related entity would trigger mandatory red-flag disclosures under Part C can file an explanatory statement under Rule 6 that says nothing about any of it. The Part C’s substantive content obligations do not migrate into the scheme document through the NOC process.

The valuation gap is equally pointed. Under SEBI’s regime, independent valuation reports must be accessible to shareholders via web link and QR code in the meeting notice itself. Rule 6(3)(v)(c) requires only a summary in the explanatory statement; the full report need only be available for inspection at the registered office. Worse, the doctrine in Miheer H Mafatlal v. Mafatlal Industries Limited confines the NCLT to procedural review; it will not reopen an expert’s valuation methodology absent manifest fraud. In an ordinary RPT, proxy advisors can publicly contest valuation assumptions in the weeks before a shareholder vote. In a scheme, the valuation is absorbed into the judicial process before dissenting shareholders can effectively organise.

The Voting Architecture and the 20% Loophole

The MoM voting requirement under LODR Regulations is the most important minority protection in the RPT framework. For a material RPT, all related parties are disenfranchised entirely: a promoter holding 70% equity cannot vote. This protection does not extend automatically to schemes of arrangement. SEBI’s Master Circulars on Schemes of Arrangement (last updated June 2023) applies MoM requirements to specific categories of related-party schemes, not uniformly. The critical trigger for intra-group asset transfers is the “substantially the whole of the undertaking” threshold: MoM approval is required only where a transfer for non-equity consideration represents 20% or more of the consolidated net worth or total income of the listed entity.

The space below this threshold is where a structural vulnerability sits. A promoter can structure a demerger that carves out a division representing 18% of consolidated net worth, transfers it to a private group entity for cash, and avoids the MoM requirement entirely. The vote then defaults to the standard Section 230 mechanism: approval by a majority representing three-quarters in value of members present and voting. Unlike LODR Regulations, Section 230 does not disenfranchise related parties. A promoter with 70% equity votes freely, crosses the 75% threshold on its own, and the minority has lost the only protection that actually matters. No SEBI rule has been broken; the threshold could simply be calibrated around.

The Limits of Judicial Oversight

In Hologram Holdings Private Limited v. NCLT, the Chandigarh Bench dismissed a scheme between related promoter entities, applying the ‘substantive business purpose test’ - an evaluation of whether a restructuring possesses genuine commercial utility and operational synergies, rather than serving as a mere corporate façade, drawn from the NCLAT’s reasoning in Wiki Kids. Finding the scheme was a vehicle for accommodation entries and artificial valuation inflation, the Tribunal declined approval on public interest grounds. But the check operates differently from disclosure-based protection. The substantive business purpose test is applied after a scheme has been filed and fully litigated, and the standard is effectively fraud or abuse, not merely that a transaction is structured to the disadvantage of minorities (unless it crosses the high evidentiary threshold of ‘fraud on the minority’) or reflects a conflict-of-interest SEBI would have required to be disclosed.

NCLT oversight can catch outright shams. It cannot put specific financial distress information in front of shareholders before a decision is made, in a forum where the promoter cannot vote. These are different functions, and one cannot substitute for the other.

Conclusion: The Case for Regulatory Convergence

The Section 230 arbitrage is not a design defect in either statute. SEBI’s framework assumes direct contractual transactions within its jurisdiction. The Companies Act 2013’s scheme procedure was built for major reorganisations warranting judicial supervision. Both are coherent in isolation. What neither anticipated is the systematic use of the second to avoid the first. SEBI’s 2025 disclosure architecture is not being violated; it is being exited.

Two targeted interventions would close the gap. First, SEBI and the MCA should require that where a listed entity is party to a scheme constituting a material RPT if executed directly, the Rule 6 explanatory statement must carry Part C disclosures as a condition of SEBI’s no-objection letter. The no-objection mechanism already exists; requiring substantive disclosure compliance as its condition is an incremental step that requires no new legislation. Second, the 20% threshold in the Master Circular should be removed. Any related-party transfer of a business unit via a scheme, regardless of percentage, should trigger MoM voting. The current threshold functions as a roadmap for calibrated avoidance, not a principled governance line.

SEBI has spent five years building a disclosure regime that takes the conflict between promoters and public shareholders seriously. The Section 230 route is the market’s answer to that effort. Closing it requires SEBI and the MCA to treat jurisdictional convergence as a governance priority, not as a boundary question between competing regulators.