SEBI’s RPT Overhaul: Efficiency Gains or Governance Risks?

[Satya and Neha are students at Hidayatullah National Law University and National Law University Odisha, respectively.]

The Securities and Exchange Board of India (SEBI), on 4 August 2025, released a consultation paper proposing significant changes to the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR) governing related party transactions (RPTs). These changes were proposed based on recommendations to the Advisory Committee on Listing Obligations and Disclosure Requirement, to facilitate ease of doing business. Although RPTs are commercially requisite, there are increased chances of conflict of interest, diversion of value, and diminishing of the rights of the minority-shareholders.

The consultation paper proposes for materiality thresholds based upon scale, harmonized standards of approval for subsidiaries, reduced disclosure requirements by smaller RPTs, exemption clarifications and formalization of the omnibus approval periods. Although the proposals aim to make compliance efficient and minimize the costs caused by excessive burdens, the proposals raise doubts on whether it is possible to make compliance effective without compromising the investor protections. This paper undertakes to comprehensively examine the recent amendments and further propose recommendations that would allow the RPT regime to remain a promoter of transparency, accountability, and safeguard the rights of minority shareholders.

Materiality Thresholds for RPTs and Shareholder Protection

The central change that was brought in was shift from the earlier “one-size-fits-all” materiality threshold of INR 1,000 crore or 10% of consolidated turnover to a scale-based framework, where the limits rise in proportion to the size of the listed entity. Introducing scale thresholds to RPTs can be described as a first step in reducing compliance burden, especially on larger corporations, yet potentially comes at taking away minority shareholder protections. Imposing a higher standard of what can qualify as “material”, will potentially cause high value transactions to fall below threshold and therefore escape shareholder approval or increased scrutiny. There is an extra risk of the lack of adequate aggregation provisions. Unless the rules of appropriate transaction make related transactions considered as a whole, companies may split large transactions into smaller ones to ensure each is below the limit, but as a set they will have transferred an amount of value nonetheless.

The Linde India Limited case highlighted the importance of such protections. In this case, minority investors protested against the sale of the company hydrogen division to a related joint venture without adequate valuation and shareholder consent, triggering lawsuits by SEBI and the Securities Appellate Tribunal. This case demonstrated that lack of proper monitoring of material transactions may impinge on minority interests and destroy the standards of governance. To avert the same set of risks in the new framework, SEBI ought to tighten the regime by requiring Independent Financial Advisor (IFA) reports on large value RPTs and have the anti-aggregation provisions, learning the lessons of the post-Satyam Computers reforms. These efforts would help in making sure that efficiency in regulation would not be at the expense of investor confidence.

Subsidiaries Without Financial Records: Oversight of Net Worth

Under the existing regime, RPTs require approval by the audit committee in case the value is over 10 per cent of the standalone turnover of the subsidiary in the last financial year. In the case of newly incorporated subsidiaries, that does not have audited financial statements for at least one year, such threshold is not applied. To overcome it the latest amendments bring in a net worth test signed by a chartered accountant as a proxy measure. As much as this will serve as a workable baseline, it can also be easily manipulated. As with the capital infusions, the companies could schedule a capital infusion, revaluations, or other accounting corrections to increase or decrease the net worth as of the date of certification, which would enable major transactions to evade scrutiny.

These risks are highlighted by the case of the Ricoh India scandal. In 2016, the company acknowledged false accounting over several years which overstated revenues and earnings until it later reported losses of more than INR 1,100 crore. This case has shown how manipulated statements can mislead regulators and investors by impairing oversight. So as to prevent similar pitfalls, SEBI may seek to direct that the audit committee should review and approve the certified net worth instead of being solely based on certification by a chartered accountant. A practical analogy can be drawn to Section 247 of the Companies Act 2013 which directs that the assets valuation or the net worth valuation shall be conducted by registered valuers selected by audit committee or by the board. Applying the same supervision on subsidiaries that have no financial records would control the level of manipulation, increase accountability and retain investor confidence.

Ratified Transactions: Risk of Rule Dilution Under Small RPT Regime

SEBI has also proposed that small RPTs that are above INR 1 crore, if they do not exceed the lower of 1% of its annual consolidated turnover or INR 10 crore can be exempted from disclosure requirement under Industry Standards. This pragmatic move prevents listed entities from seeking approval for every minor transaction. However, under Regulation 23(2)(i) of LODR, the ability to ratify a transaction is capped at INR 1 crore, but inclusion of ratification into transactions stretching up to INR 10 crore creates an ambiguity, leading companies to believe they can seek post-facto approval for transactions well beyond the legally mandated INR 1 crore ceiling. To prevent this, SEBI should clarify that the INR 1 crore cap for ratification remains untouched and the "small RPT" classification with its higher INR 10 crore threshold as a framework solely for determining the required disclosure format. This clear distinction would ensure that the new disclosure flexibility does not expand the scope for post-facto approvals maintaining integrity of the regulatory framework.

Another concern arises from the excessive discretion provided by the term redaction of commercial secrets under the industry standards. This provision helps entities to safeguard sensitive data, but creates an open-ended exemption that, they could exploit to withhold material RPT details under the guise of confidentiality, undermining shareholder oversight. SEBI addressed a similar issue under SEBI (Prohibition of Insider Trading) Regulations 2015 where it clarified the scope of 'unpublished price sensitive information' to prevent misuse. A similar definitional framework is imperative to balance confidentiality with transparent, enforceable standards to ensure that it is not exploited.

Omnibus Approvals: Alignment of Validity Periods

The consultation paper proposes a formalized validity period for shareholder omnibus approvals by incorporating Paragraph (C)11 of Section III of the master circular on LODR where shareholders' omnibus approval for RPTs is valid for up to fifteen months if obtained at an annual general meeting (AGM) and up to one year if obtained at any other general meeting. This change provides a greater regulatory coherence by aligning it with the AGM timeline prescribed in Section 96 of the Companies Act 2013 addressing a long-standing ambiguity in RPT framework. However, the proposed 15-month validity for shareholder approval at an AGM creates a three-month regulatory gap as the existing framework for Audit Committee omnibus approval is valid for one year. Audit Committee is the primary gatekeeper for independent scrutiny of RPTs, such a gap can be used to push transactions without their oversight undermining corporate governance safeguards. SEBI should mandate that the validity periods be aligned, with a maximum cap of one year for both approvals. This would ensure that the new compliance proposal upholds the tiered approval process.

Among the forward-looking proposals is removing 'employees' under the proviso (e) of Regulation 2(1)(zc) of LODR. This move is intended to align with the definition of related party as per the Companies Act 2013 and LODR by providing exemptions on retail purchases only to directors or key managerial personnel(s) of listed entity or its subsidiary also extending its scope to their relatives. Though this change helps in reducing redundancies it can create ambiguity to employees deterring them from availing genuine staff benefits like discounts on company products, concessional loans etc. This can be avoided if SEBI explicitly clarified that employees and their relatives are outside RPT norms similar to how it clarified that holding company only includes listed holding company under the Regulation 23(5)(b) of LODR to ensure clarity and continued benefit usage.

Conclusion

SEBI’s consultation paper provides a forward-looking approach to ease compliance, maintain uniform standards, and reduce redundant disclosure norms within which the RPTs operate. By rationalizing material thresholds, harmonizing subsidiary standards, aligning approval timelines it intends to bring coherence to the regulatory framework. However, with any structural reform the success of its proposal heavily depends on its implementation. 

Challenges might arise in ensuring the protection of minority shareholders at higher thresholds which must be overseen by incorporating safeguards like mandatory reviewal by an IFA, curbing manipulation of net worth certification must be anchored with stricter valuation standards, preventing small RPTs from inadvertently expanding the scope of post-facto ratifications must be grounded with precise definitions. If these major shortcomings can be addressed SEBI can reinforce transparency and integrity of corporate governance in India’s RPT framework.