Redefining Materiality: SEBI’s Proposed Changes in the RPT Framework

Introduction

In a move to promote ease of doingbusiness, the Securities and Exchange Board of India (“SEBI”) has recently amended the framework for regulating related party transactions (“RPT”). These changes were first introduced through a consultation paper titled ‘Amendments to Provisions Relating to Related Party Transactions Under SEBI (LODR) Regulations, 2015’^[1] (“Consultation Paper”), which have now been formally notified by SEBI. These reforms bring significant changes to the existing regime, particularly with respect to thresholds for materiality and treatment of subsidiaries. This article aims to analyse the implications of these amendments on corporate governance and address any shortfalls in the regulatory framework.

Scale-Based Thresholds for Materiality

Earlier, Regulation 23(1) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) stated that any RPT in a listed entity will be considered material and required a shareholder approval if the transaction either individually or combined with other RPTs during the same financial year amounted to INR 1,000 crore and above, or 10% of the listed entity’s annual consolidated turnover (whichever is lower).

While this materiality test was a ‘one size fits all’ formula, SEBI observed that it led to disproportionate compliance costs for high turnover companies, requiring them to seek shareholder approval for routine transactions that did not necessarily merit minority scrutiny.^[2] To overcome this, the SEBI by inserting Schedule XII, has imposed a scale-based test for defining materiality based on the consolidated annual turnover of the listed entity for reporting RPTs, as follows:

• For companies with an annual consolidated turnover up to INR 20,000 crore: the materiality threshold will be10% of the annual consolidated turnover.
• For companies with an annual consolidated turnover of more than INR 20,000 crore but not more than INR 40,000 crore:the materiality threshold will be INR 2,000 crore plus 5% of the turnover exceeding INR 20,000 crore.
• For companies with an annual consolidated turnover of more than INR 40,000 crore: the materiality threshold will be INR 3,000 crore plus 2.5% of the turnover exceeding INR 40,000 crore, subject to a maximum cap of INR5,000 crore.

To simplify, the materiality threshold of a RPTfor a listed entity with a turnover of INR 15,000 crore to seek shareholder approval wouldbe INR 1500 crore(10 % of annual consolidated turnover) and for a listed entity with INR 50,000 crore turnover, the materiality threshold will be INR 3,250 crore, subject to the cap of INR5,000 crore.

Further, in case of the companieslisted on the SME Exchange, the materiality threshold for RPT has been prescribed as INR 50 Crore or 10% of the entity’s annual consolidated turnover, whichever is lower, whether assessed individually or cumulatively during afinancial year.  

The amendment brings India in line with international practices, which use proportionate thresholds based on company size rather than a single fixed limit. For instance, Singapore calculates materiality using a combination of turnover and net tangible assets^[3], while the UK compares the transaction size to the company’s net worth.^[4] Furthermore, SEBI in itsConsultation Paper had back-tested this approach on the top hundred listed entities on NSE for FY 23-24and 24-25, which had revealed that the number of transactions requiring shareholder approval would drop by nearly 60%, significantly reducing compliance burdens. However, while reducing compliance costs, SEBI has balancedinvestor protection by setting a maximum cap of INR 5,000 crore, above which all transactions are considered material, ensuring that large conglomerates cannot escapescrutiny for large deals.

Despite these advantages, theframework raises some concerns. SEBI’s turnover-based approach may underestimate the significance of RPTs in asset-heavy sectors like infrastructure, where the size of transactions may be significant relative to assets, yet appear small when measured against turnover. To address thisl imitation, SEBI could consider adopting a dual-threshold system, as seen in jurisdictions like the UK^[5] and Singapore^[6], wherein the materiality is determined using a combination approach of turnover and total assets/net worth. Such an approach would ensure that transactions significant relative to acompany’s size are captured, providing better oversight for asset-heavy sectorsand preventing large but turnover-light transactions from escaping scrutiny.

Another limitation of the amendment is that it does not fully address transaction fragmentation. Companies could still divide a large transaction into several smaller RPTs, each below the materiality threshold, to avoid shareholder approval. International frameworks such asthose in Singapore and the UK, address this through aggregation rules, which require all transactions with the same related party over a set period (usually 12 months) to be considered together. SEBI could consider introducing a similar aggregation mechanism to ensure that materiality reflects the total economic impact of RPTs,there by preventing potential manipulation or fraudulent structuring of transactions.

Subsidiary RPTs: Harmonization and Net Worth Tests

Prior to the amendment, Regulation 23(2)(c) of the LODR stated that an audit committee of a listed entity has to approve an RPT entered into by the listed entity’s subsidiary, even if such RPT does not directly involve the parentlisted entity, if the transaction alone or combined with others during thefinancial year, exceeds  ten percent of the subsidiary’s standalone turnover. SEBI’s amendment to this regulation, addsanother layer by requiring that audit committee approval is needed if the transaction exceeds either the existing subsidiary threshold (i.e., 10 percent of the standalone turnover) or thescale-based parent-level group threshold explained above, whichever is lower. This dual trigger ensures that transactions significant at the parent or group level are not overlooked simply because they appear small on the subsidiary’s books.

For subsidiaries less than a year old that do not have audited financials, it is proposed that approvals be based on 10% of the subsidiary’s aggregate value of paid-up share capital and securities premium account of the subsidiary or the scale-based parent-level group threshold explained above, whichever being the lower.

In practice, the reform willrequire listed companies to coordinate closely with their subsidiaries’ finance teams, potentially increasing compliance costs. Large conglomerates may alsoneed enterprise-wide systems to track RPTs across subsidiaries, ensuring proper oversight while reducing the risk of promoter-driven value transfers.

Tiered Requirements

Apart from introducing the above amendments, the consultation paper also proposed changes relating to disclosure requirements for RPTs. Although this particular amendment has not yet been notified by SEBI, it seeks to streamline and strengthen reporting standards andensure greater transparency in related party dealings.

Currently , any RPT above INR 1crore demanded exhaustive disclosures to both audit committees and shareholders.^[8] The Consultation Paper proposes the following thresholds for disclosure:

• For RPTs with a value up to INR 1 crore during a financial year: No disclosure required (small RPT).
• For RPTs with a value more than INR 1 crore but up to the lower of 1% of turnoveror INR 10 crore during a financial year: Limited disclosure to the Audit Committee (moderate RPT).
• For RPTs with a value above the materiality threshold: Full disclosure and shareholder approval required (materialRPT).

This framework balances transparency for large deals with the need to avoid bureaucratic overload forminor transactions, particularly in larger corporations. For moderate-valueRPTs, the information to be provided is less burden some than full RPT industry standards. For material transactions, audit committees and shareholders must receive comprehensive summaries, external valuation reports (if any), justification for the deal, and percentage impact relative to counterparty turnover.

While these measures reduce compliance burdens for smaller transactions, it is important to note a keypoint regarding approval requirements under existing regulations. Regulation 23(2)(i) of the LODR currently requires that any RPT above INR 1 crore must be approved by the audit committee. The proposed introduction of multiple thresholds for different typesof transactions primarily affects disclosure formats rather than the approval requirement. To avoid confusion, SEBI should clarify that the INR 1 crore approvallimit remains unchanged and that the new thresholds only guide reporting and disclosure.

Conclusion

SEBI’s amendments marks a move toward a more risk-sensitive and proportionate RPT regime, easing compliance for large corporates while aligning India with global practices. In practice,companies will need robust analytics and reporting systems to monitortransactions across time and counter parties. While compliance burdens are reduced, the amendments demand stronger internal oversight to prevent regulatory arbitrage. Balancing ease of doing business with minority shareholder protection will determine the success of these amendments in strengthening India’s corporate governance.

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References

[1]Securities and Exchange Board of India, Consultation Paper on Amendments to Provisions Relating to Related Party Transactions under SEBI (ListingObligations and Disclosure Requirements) Regulations, 2015 and CircularsThereunder, Aug. 4, 2025, available at https://www.sebi.gov.in/reports-and-statistics/reports/aug-2025/consultation-paper-on-amendments-to-provisions-relating-to-related-party-transactions-under-sebi-lodr-regulations-2015-and-circulars-thereunder_95824.html

[2]Supra 2

[3]Financial Conduct Authority, FCA Handbook, available athttps://www.handbook.fca.org.uk/ (last visited Oct. 3, 2025)

[4]Financial Conduct Authority, FCA Handbook, available athttps://www.handbook.fca.org.uk/ (last visited Oct. 3, 2025)

[5]Supra 4

[6]Supra 3

[7]Regulation 23(2)(i), Securities and Exchange Board of India (ListingObligations and Disclosure Requirements) Regulations, 2015

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