Authored By: Maanya Chowdhary
Vivekananda Institute of Professional Studies-TC
ABSTRACT
This article examines the evolution of SEBI’s regulatory framework governing related party transactions (RPTs) under the Listing Obligations and Disclosure Requirements Regulations, with particular emphasis on minority shareholder protection in India’s promoter-driven corporate structure. It analyses key reforms relating to the expansion of the definition of related parties, enhanced approval mechanisms, and the introduction of graded materiality thresholds under Schedule XII. While these reforms have strengthened procedural safeguards and addressed earlier proportionality concerns, the article argues that certain design choices continue to raise practical challenges. In particular, the widening of the related party definition and the adoption of rigid quantitative disclosure thresholds risk shareholder disenfranchisement and information overload, potentially diluting the effectiveness of the regulatory regime. The article concludes that although SEBI’s reforms mark a significant improvement in the governance of RPTs, further refinement is required to balance transparency, minority protection, and shareholder participation.
INTRODUCTION
Related-party transactions are arrangements between parties with existing business ties or common interests. Shareholders in a promoter-driven structure have enjoyed significant influence over decision-making. In such an environment, any exchange between the company and its related party may turn hostile, even though not inherently unlawful.
Related party transactions often result in the diversion of resources and endanger the interests of minority shareholders. These transactions are often made without proper justification and are not at arm’s length. RPT can be used to inflate earnings, hide liabilities or manipulate cash flow, misleading investors about the company’s true financial health and thus being fraudulent. This distorts valuation metrics, affects stock prices and undermines market efficiency.[1]
Such a transaction may lead to capital depletion and may further insolvency risk as funds raised by investors may be directed to a related party.
This may turn into an unfair market practice as it may contribute to creation of artificial demand and supply as well as influence liquidity[2]
Stock Exchange Board of India (SEBI), through its Listing Obligation and Disclosure, 2015, introduced a comprehensive framework to deal with the corporate governance issue of Related Party Transaction. Ut focuses on protecting interests of minority shareholders and public money.
SEBI now aims to establish optimal regulations, environment of trust between the regulator and corporate India, avoidance of micromanagement, and simplify and clearly draft regulations to facilitate ease of doing business.[3]
This article aims to examine key SEBI reforms relating to related party transactions and analyse them with respect to their effect on such transactions. Evolution of SEBI’s Regulatory Framework on RPTs
EVOLUTION STATUTORY FRAMEWORK
Definition
In 1995, Parliament empowered SEBI to frame regulations on matters relating to the issue and transfer of securities and the manner of disclosures, with the objective of investor protection. SEBI was further authorised to prescribe listing requirements and to issue directions to listed or proposed-to-be-listed companies. In this context, SEBI introduced the LODR Regulations as a comprehensive framework to standardise disclosure obligations and address concerns of excessive discretion being exercised under the guise of flexibility.
Initially, Regulation 2 (ZB) defined related party as defined under subsection (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards.[4] Under the Companies Act, a related party includes directors and key managerial personnel and their relatives, firms in which such persons or their relatives are partners, and private companies in which they are members or directors. It also covers public companies where a director or manager, along with relatives, holds more than two percent of the paid-up share capital, as well as holding, subsidiary, and associate companies, including fellow subsidiaries.[5]
The Sixth Amendment added that the following will be deemed as Related Party to include promoters and equity shareholders as well.[6] A large number of Indian businesses are organised as closely connected group entities that function as a single economic unit. In these structures, promoters often exercise influence across the entire group. As a result, a promoter or promoter group may control a company even where the shareholding is not substantial.
In Religare enterprise order, SEBI observed that there may also be instances where a shareholder is not formally classified as a promoter but is still able to influence the decisions of the listed entity. The regulatory framework was expanded to capture transactions undertaken directly or indirectly with the intent or effect of benefiting related parties, even where such parties are not immediate counterparties.[7]
This influence may arise due to the extent of shareholding and the ability to affect key managerial or policy decisions
Initial definition of RPT included transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged, and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract.[8]
To tighten the regulation of RPT, the definition was expanded to cover transactions carried out, directly or indirectly, to benefit related parties. The previous regulatory framework for Related Party Transactions (RPTs) did not fully cover situations where a listed company could transfer assets or value to a subsidiary, whether in India or abroad. That subsidiary could then engage in transactions with the listed company’s related parties to move those assets outside the consolidated group.
In Linde India ltd order, SEBI noted that prior to the amendment, transactions routed through subsidiaries could result in transfer of value to related parties without attracting approval requirements, thereby defeating the purpose of RPT regulation.[9]
Thus, certain strategies were used to prevent certain transactions from being classified as RPTs, allowing companies to bypass regulatory compliance and disclosure requirements.
However, certain corporate actions such as payment of dividends; subdivision or consolidation of securities; issuance of securities by way of a rights issue or a bonus issue; and buy -back of securities, are exempted from the scope of RPTs.[10]
Materiality Threshold
Regulation 23 provides for materiality thresholds with respect to RPTs. The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions. Board member shall duly approve such threshold limits, and it shall be reviewed once in three years and updated accordingly.
Initially, only those RPTs were considered material where the transaction(s) to be entered into individually or taken together exceeded Rs. 1000 Cr or 10 per cent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity[11] A transaction with
RPT will be considered material, whether entered into individually or together with previous transactions, if it exceeds the threshold given in Schedule 12[12]
Up to ₹20,000 crore turnover: 10% of the annual consolidated turnover.
More than ₹20,000 crore up to ₹40,000 crore: ₹2,000 crore plus 5% of the turnover exceeding ₹20,000 crore.
More than ₹40,000 crore: ₹3,000 crore plus 2.5% of the turnover exceeding ₹40,000 crore, or ₹5,000 crore, whichever is lower. [13]
SEBI found that initial threshold was onerous for listed entities with high turnovers.[14]
The revised framework seeks to reduce compliance costs. SEBI’s back-testing for the financial years 2023-24 and 2024-25 indicated that the graded thresholds would lower the number of related party transactions requiring shareholder approval by nearly 60 per cent for large listed companies.[15]
The changes also allow routine intragroup transactions to proceed more efficiently. Large conglomerates with high turnover were earlier required to obtain shareholder approval even for regular transactions that did not materially affect minority shareholders.
Further, the tiered structure reflects the principle of proportionality. While the materiality threshold increases with the size of the company, it does so at a slower rate, ensuring continued oversight of high-value transactions.
Further, all RPTS were to be approved by audit committee. However, the third amendment to LODR made it mandatory that only an independent director shall approve a related party. Under sub-regulation (2)[16]
Under Regulation (4), All material related party transactions shall require prior approval of the shareholders through resolution and no related party shall vote to approve such resolutions, whether the entity is a related party to the particular transaction or not.[17]
The restriction was intended to reduce conflicts of interest. Non-independent directors, including promoter-directors and executive directors, may have direct or indirect interests in transactions between the company and its related entities. Limiting decision-making to independent directors ensures that those who stand to benefit personally are not able to influence the approval process.
In RT Exports Ltd v SEBI[18]the company sold its property to a related party in a transaction that crossed the prescribed materiality threshold. SEBI found that the transaction was completed without obtaining prior approval from shareholders, as required under Regulation 23(4). The Securities Appellate Tribunal affirmed that “prior approval” must be secured before entering into the transaction, and that approval obtained after the fact cannot cure a violation involving a material related party transaction. The ruling reinforces the preventive nature of the regulation, aimed at stopping diversion of funds or value at the outset rather than validating it retrospectively.
The measure also strengthens protection for minority shareholders. By excluding interested parties from the committee’s decision-making, SEBI sought to reduce the risk of diversion of funds or value through unfair related party transactions, which often have a disproportionate impact on minority investors.
Disclosure Requirement
Under regulation 30, every listed entity was bound to make disclosures regarding events which was material in opinion of board. Events specified in Para A of Part A of Schedule III are deemed to be material events and listed entity shall make disclosure of such events. [19]
Initially, sub-regulation (c) stated where the criteria specified in sub-clauses (a) and (b) are not applicable, an event/information may be treated as being material if it is considered material by board of directors.[20]
Before the amendment, the NDTV matter[21] illustrated how boards exercised discretion to limit disclosure obligations. In that case, NDTV did not disclose a tax demand of ₹450 crore on the ground that it was under dispute and therefore not material. SEBI, however, observed that the amount was significant when compared to the company’s net worth and revenue at the relevant time. The case highlighted how reliance on the “opinion of the board” could be used to justify non-disclosure. The introduction of objective, quantitative thresholds such as 2 per cent of turnover or 5 per cent of profits seeks to eliminate this subjectivity by replacing discretion with a purely numerical standard
The third amendment substituted it by a specific quantitative criterion. Listed entities must now disclose events if their value or expected impact exceeds the lower of 2% of turnover, 2% of net worth, or 5% of the average absolute profit/loss after tax, based on the last three years audited consolidated financials.
This amendment was made to make provision regarding disclosure more objective and discretionary.[22] The specific quantitative limits will tie up the loose ends in disclosure. The step can surely be termed as stringent, and has an impact of making the compliance more rigid. The quantitative thresholds of materiality, being minuscule, may seemingly have an impact of providing redundant information on the stock exchanges[23]
CRITICAL APPRAISAL OF RPTs Reform
Reforms That Strengthened Minority Protection Shareholder
Before the introduction of Schedule XII, transactions were considered material if they crossed ₹1,000 crore or 10 per cent of the company’s annual consolidated turnover, whichever was lower. This rigid approach was widely criticised as outdated and poorly aligned with differences in company size.
The framework had a disproportionate impact on companies. Smaller firms with annual turnovers below ₹10,000 crore often crossed the 10 per cent threshold even for routine transactions, which resulted in mandatory shareholder approvals, higher compliance costs, and operational delays. In contrast, large companies were able to undertake very high-value transactions below the absolute cap of ₹1,000 crore without triggering shareholder scrutiny, allowing potentially material conflicts of interest to remain unexamined.[24]
This uniform model failed to account for economic scale, leading to excessive regulation of smaller entities while providing insufficient oversight for large conglomerates.
Schedule XII introduced a slab-based and turnover-linked approach. It addressed the limitation of earlier provisions with respect to materiality by adopting a more proportional and risk-sensitive model that balances governance with ease of doing business.
Persisting Limitations and Challenges
The shareholding threshold determining who is a related party precludes them from approving the transaction and would disenfranchise several investors. Financial investors like LIC, and the Indian Government would not be exempt from this disenfranchisement if they crossed these thresholds. The chances that investors will get disenfranchised double when the threshold goes down to 10%.[25] Subjecting such investors may undermine shareholder participation, particularly where such investors hold public money.
There could be difficulties for the company to compile a comprehensive list of these newly-covered entities. Identifying persons who hold 20% or more may present some difficulties; the definitions under the two laws are different in detail and hence it may still be difficult for the company to prepare an accurate list of related parties covered by these amendments.[26]
Under the framework, a shareholder who crosses the specified shareholding threshold is automatically treated as a related party and is prohibited from voting on the transaction. This exclusion applies even where the shareholder has no real or direct conflict of interest. Consequently, investors with purely financial or passive holdings are denied their voting rights solely on the basis of the size of their shareholding.
Stakeholders criticized the 2%-2%-5% materiality thresholds in the third amendment to LODR as too low, arguing they would significantly increase disclosure volumes and impose extra compliance burdens on listed entities[27]
The fixed parameter of 2 per cent of net worth or turnover, may label operational transaction as material, even when they are not related to investor decision-making. This approach may reduce materiality to a compliance exercise and dilute informational value, leading to a situation where material transactions are overlooked.
CONCLUSION
The development of SEBI’s regulatory approach to Related Party Transactions reflects an attempt to strike a careful balance between protecting minority shareholders from diversion of value and promoting ease of doing business within India’s largely promoter-led corporate environment. Through multiple amendments to the LODR Regulations, SEBI has moved away from a principles-based framework towards a more prescriptive regime, thereby narrowing gaps that earlier permitted value extraction through layered subsidiary structures and influential non-promoter shareholders.
The introduction of Schedule XII and graded materiality thresholds reflects a clear shift towards proportional regulation by replacing the earlier fixed ₹1,000 crore limit with slab-based thresholds. This reform corrects the imbalance under which smaller companies were subjected to disproportionate scrutiny while large corporate groups could structure high-value transactions to avoid oversight. The move towards objective, numerical standards such as the 2 per cent and 5 per cent thresholds has also reduced dependence on subjective board discretion that previously enabled selective non-disclosure, as illustrated by the NDTV case. However, concerns persist regarding the automatic disenfranchisement of shareholders crossing the 10-20 per cent holding threshold, which may exclude purely financial investors like LIC from voting, and the risk that lower quantitative triggers could lead to disclosure overload, diluting the practical value of information for investors
Overall, although the current RPT framework increases compliance obligations, it operates as an important safeguard against risks of capital erosion and financial instability. Going forward, the effectiveness of the regime will depend on SEBI’s ability to further refine the concept of a related party, to clearly distinguish between active control and passive investment, while maintaining transparency without unduly constraining corporate decision-making.
REFERENCE(S):
[1] Mustafa Surka, ‘Fraud in related party transactions: Can we spot the rot?’ (KPMG India, 1 October 2025) <https://kpmg.com/in/en/blogs/2025/10/fraud-in-related-party-transactions-can-we-spot-the-rot.html> accessed 31 January 2026
[2]ibid
[3] Bharat Vasani, Ayush Lahoti & Maharshi Shah, ‘Ten Years of LODR: The Journey from “Minimum Principles” to “Maximum Prescriptions”’ ( Cyril Amarchand Mangaldas, 29 May 2025) <https://corporate.cyrilamarchandblogs.com/2025/05/ten-years-of-lodr-the-journey-from-minimum-principles-to-maximum-prescriptions/>accessed 31 Jan. 26
[4] SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, notified 2 September 2015.
[5] Companies Act 2013, s 2(76).
[6] SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations 2021, notified 9 November 2021.
[7] Securities and Exchange Board of India, Order in the Matter of Religare Enterprises Limited (WTM/GM/IVD/100/2018-19, order under ss 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act 1992, 2018).
[8] SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, notified 2 September 2015.
[9] Securities and Exchange Board of India, Order in the Matter of Linde India Ltd (WTM/AB/CFID/CFID-SEC3/30578/2024-25, order under ss 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act 1992, 2024).
[10] SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, proviso (b) to reg 2(zc) (as notified on 2 September 2015).
[11] 23 SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, reg 23 (as originally notified on 2 September 2015).
[12] SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations 2025, reg 23 (notified 16 December 2025).
[13] SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, sch XII (inserted by notification dated 10 December 2025).
[14] Securities and Exchange Board of India, Consultation Paper on Proposals for Ease of Doing Business: Amendments to Provisions Relating to Related Party Transactions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Circulars Thereunder (4 August 2025).
[15] ibid
[16] Securities and Exchange Board of India, SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations 2021 (notified 9 November 2021).
[17] SEBI LODR Regulations 2015, reg 23 (as amended 16 December 2025).
[18] Securities and Exchange Board of India, Adjudication Order in the Matter of RT Exports Ltd (Adjudication Order No Order/SS/VS/2019-20/4515–4521, passed under s 15-I of the Securities and Exchange Board of India Act 1992 read with r 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules 1995).
[19] SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, reg 30(2) (unamended, prior to notification dated 16 December 2025).
[20] SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, notified 2 September 2015.
[21] Securities and Exchange Board of India, Order in the Matter of New Delhi Television Ltd (WTM/SKM/EFD-1-DRA-II/03/2019-20, order under ss 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act 1992, 2019).
[22] SEBI, Amendments to Requirements for Disclosure of Material Events or Information (April 2023).
[23] Vinod Kothari Consultants, ‘SEBI approves relaxed norms on RPTs’ (Vinod Kothari Consultants, 20 november 2025) < https://vinodkothari.com/2025/11/sebi-approves-relaxed-norms> accessed 31 January 2025
[24] Vrinda Patodia & Priyanka R. Narayan, ‘Recalibrating Corporate Governance: An Analysis of the SEBI LODR 5th Amendment, 2025, (9 December 2025)<https://www.lexology.com/library/detail.aspx?g=9afde69b-b63a-4af7-808c-47bc7dc53637> accessed 31 Jan. 2026
[25]Chaitanya Gupta, ‘Reconsidering Related Party Regulations: Critical Analysis of SEBI (LODR) Regulations 2021’ (Centre for Business and Commercial Law, 21 October 2023)< https://cbcl.nliu.ac.in/company-law/reconsidering-related-party-regulations-critical-analysis-of-sebi-lodr-regulations-2021/> accessed 31 Jan. 26
[26] Jayant M. Thakur, ‘Regulation Of Related Party Transactions – Proposed Amendments’ (Bombay Chartant Accountants’ Journal, March 2020) <https://bcajonline.org/journal/regulation-of-related-party-transactions-proposed-amendments/?hl=en-US> accessed 31 Jan. 26
[27] Securities and Exchange Board of India, Amendments to Requirements for Disclosure of Material Events or Information by Listed Entities under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI, April 2023).
