Balancing Governance and Ease of Doing Business: A Critical Analysis of SEBI’s Proposed RPT Reforms

{Tanmayee Sethy and Sanidhya Somvanshee are 4th year law students at National Law University Odisha}

Introduction

India’s Related Party Transactions (RPTs) regime sits at a crossroads where regulators seek to ease compliance for large corporates while preserving minority protection, and SEBI’s 4 August 2025 consultation paper proposes a risk-weighted recalibration of threshold, disclosures and subsidiary oversight to navigate that tension. The consultation paper proposes a significant overhaul of the process and provisions concerning RPTs under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).

SEBI has consistently refined the RPT framework, particularly since 2021, reflecting a proactive approach towards enhancing corporate governance. The current proposals include scale‑based thresholds for determining material RPTs, clearer approval triggers for subsidiary transactions, and alignment with revised, tiered disclosure standards that take effect on September 1, 2025. These changes are significant because they move away from a one‑size‑fits‑all approach that has drawn criticism for imposing disproportionate burdens on large corporations, while aiming to preserve safeguards against conflict‑driven value diversion and minority rights erosion.

This article critically analyses the proposed reforms to the RPT framework, identifying key gaps and offering recommendations to ensure that the reforms strengthen corporate governance while advancing the objective of ease of doing business.

Analysing the Proposed Reforms: Challenges and Recommendations

Scale-Based Thresholds for Material RPTs

The consultation paper suggests significant changes to Regulation 23 (1) of the LODR regulations on defining material RPTs. The present rule classifies RPT as material if it exceeds ₹1000 crore or 10% of consolidated turnover, whichever is lower. SEBI recognises that such a “one size fits all” approach burdens high-turnover companies, as even large transactions that are minor in proportion to their scale require shareholder approval.

To address this, SEBI proposes a scale-based threshold. The 10% rule still applies for companies having turnover up to ₹20,000 crores. For turnovers of ₹20,001–40,000 crore, the proposed threshold is “₹2,000 crore + 5% of turnover above ₹20,000 crore”; above ₹40,000 crore it is “₹3,000 crore + 2.5% of turnover above ₹40,000 crore”, with an absolute maximum of ₹5,000 crore. SEBI’s back-testing indicates that the proposed amendment might reduce shareholder approvals for RPTs by around 60%, simplifying operations for listed businesses.

However, there is a fundamental limitation with turnover based materiality assessment. For instance, retail and e-commerce industries have higher turnover due to their relatively low fixed assets, whereas sectors like telecommunication and manufacturing have lower turnover due high capital expenditure. SEBI’s slabbed formula, which uses turnover as the sole proxy, risks under- or over-regulating different industries. Global regime like US do not prescribe hard quantitative cut-offs for materiality, instead it applies a quantitative threshold of 5% of net revenue or 5% of total assets, combined with qualitative factors such as impact on financial ratios and compliance obligations. Similarly, UK’s Listing Regulationsemploy different tests by transaction type, such as gross assets for asset deals, consideration for purchases and sales, and gross capital for equity transactions, to ensure thresholds reflect a transaction’s substance.

The above examples stress that determination of materiality should not be mechanical, instead it should be based on both quantitative as well as qualitative determinants. But SEBI’s siloed model on determining materiality could disproportionately affect different sectors. To overcome this crucial gap SEBI should adopt a multi-faceted approach, which combines quantitative thresholds with qualitative criteria. For instance, SEBI could adopt UK-style ‘class test’, pairing turnover-based assessment with additional test of materiality based on gross assets, consideration, profits, and net worth for different transaction categories. Adapting this model will resolve the issue where turnover based materiality test fails, particularly in sectors with atypical turnover-to-asset/profit profile.

Subsidiary Transactions: Harmonised Dual Thresholds

SEBI has also proposed changing thresholds for material RPTs by subsidiaries. Currently, Regulation 23(2) of LODR requires approval by the audit committee for RPTs that exceed 10% of an unlisted subsidiary's standalone turnover. However, SEBI identified two key issues: (i) RPTs that might be considered material for shareholder approval may bypass subsidiary audit committee scrutiny because they do not exceed 10% subsidiary’s standalone turnover; (ii) the 10% threshold is challenging for new subsidiaries that lack financial track records.

To address this, SEBI proposes that an RPT exceeding ₹1 crore for subsidiaries with financial records would need approval of Audit Committee if it exceeds the ‘lower of’ (i) 10% of the subsidiary’s standalone turnover or (ii) the proposed threshold under Regulation 23(1) of LODR. Further, subsidiaries without a financial track record, will require the audit committee's approval if the transaction exceeds (i) 10% of standalone net worth (or share capital/premium if negative) or (ii) the proposed threshold for material RPT.

The proposed reforms align subsidiary RPT thresholds with those of the listed entity, seeking to bridge gaps where significant transactions may require shareholder approval, but not audit committee, approval. For large entities with turnover in thousands of crores, the exemption of RPTs up to ₹1 crore relieves audit committees from handling minor transactions.

 However, it is significant to note that the 10% threshold may result in frequent unnecessary approvals by the audit committee for small operational transactions in new subsidiaries with very low net worth. A preferable procedure would be to apply the 10% rule combined with a specified minimum amount (e.g.- the material RPT exceeds 10% threshold and is also more than a specified amount decided by SEBI, say Rs. 1 crore), so that only transactions with both big proportions and significant values require approval.

Further, the ₹1 crore trigger may be too low for high-value sectors, resulting in unnecessary approvals. SEBI should instead change the ₹1 crore minimum bar to a more proportionate level for such sectors to reduce approvals for insignificant transactions.

Tiered Disclosure Requirements

With effect from September 1, 2025, Industry Standards on “Minimum information to be provided to the Audit Committee and Shareholders for approval of Related Party Transactions” (RPT   Industry Standards) exempts RPTs totaling ₹1 crore in a fiscal year from disclosure requirements. The proposal offers additional relief from the RPT Industry Standards by proposing a tiered approach: for RPTs above ₹1 crore but still “small”, simplified disclosures would suffice. Concretely, SEBI suggests that if the total RPT(s) exceed ₹1 crore but do not exceed 1% of consolidated turnover or ₹10 crore (whichever is lower), then the company can furnish the scaled-down information as per the draft circular placed as Annexure 2 in the consultation paper. Furthermore, transactions exceeding the 1% or ₹10 crore thresholds will remain subject to disclosure requirements as per RPT Industry Standards.

The proposal establishes an additional buffer, wherein transactions between ₹1 crore and the new threshold will be subject to a relaxed regime with limited disclosures as outlined in the draft Circular. The advantage is evident: Audit Committees and shareholders are required to examine detailed filings solely for relatively significant RPTs. While this rationalizes compliance, the disclosure framework must avoid becoming overly rigid or formulaic. RPTs require nuanced evaluation and professional judgment, and relying too heavily on standardized, one-size-fits-all reporting formats can reduce decision‑useful detail; moderate‑value but high‑risk RPTs could slip through templates; and promoter‑dominated boards may under‑disclose where audit committees lack sufficient independence.

It must also be taken into account that audit committees in India often lack true independence, despite Regulation 23(2) requiring only independent directors to approve RPTs. With their effectiveness under scrutiny and SEBI calling for greater effectiveness of independent directors, easing disclosure norms could weaken shareholder oversight. To mitigate this, it is essential that audit committees retain the authority to request detailed information when they suspect that a transaction, regardless of its size, may jeopardize governance.

Clarifications on Exemptions and Scope of RPTs

The SEBI also proposes two clarifications aimed at removing interpretive uncertainty. First, the retail purchase exemption under proviso (e) to Regulation 2(1) (zc) currently applies only to employees, excluding relatives of directors or Key Managerial Personnel (KMPs) even when they transact on identical, non-preferential terms. This is addressed by specifically including relatives of directors and KMPs in the exemption. However, the wording of the proposed provision may have the unintended effect of creating a drafting loophole. The phrase "uniformly applicable/offered to all employees and directors and key managerial personnel(s),” could be read as taking the terms offered to directors or KMPs themselves as the reference point, which may be more favorable than those available to the general employee base. For instance, if ordinary employees receive a 10% staff discount while directors/KMPs get a 30% executive discount, a permissive reading could wrongly exempt a director’s relative who buys at 30%. The intended and correct reading is that the exemption applies only to purchases made on employee-level terms (10%), so a purchase at 30% would not qualify.For regulatory clarity and to safeguard against misuse, the provision should explicitly state that the reference point must be the general employee-level terms, ensuring that the exemption applies only to genuinely non-preferential retail transactions.

The second clarification pertains to Regulation 23(5)(b) of LODR Regulations. As per the said regulation the transactions between a holding company and its wholly owned subsidiary are exempted from both the audit committee and shareholders’ approval requirements. The consultation paper proposes to insert an explanation in the regulation that “holding company” means a listed holding company to clarify that the exemption applies only where the holding company is listed. While this is a welcome clarification, SEBI should, rather than introducing this as an “explanation,” the term “listed” should be embedded directly into clause (b) to remove interpretive ambiguity. The redrafted provision could be framed as follows:

“Transactions entered into between a listed holding company and its wholly owned subsidiary, whose accounts are consolidated with such listed holding company and placed before the shareholders at the general meeting for approval.”

Embedding term “Listed” text in the clause, instead of relying on an explanation, provides durable certainty, avoids piecemeal revisions, and preserves the substantive policy intent reflected in the consultation.

Conclusion

SEBI's consultation paper marks a significant move towards a calibrated, risk-weighted RPT framework aimed at improving the "Ease of Doing Business". While the departure from a rigid "one-size-fits-all" approach is a positive step, the proposals introduce potential loopholes and complexities. Issues like turnover as a sole proxy for determination of material RPTs, burdensome compliance for subsidiaries, and drafting oversights in exemptions require refinement. A holistic, principle-driven overhaul, rather than piecemeal amendments, would best balance ease of doing business with shareholder protection.