SEBI Proposes Groundbreaking Reforms to Related Party Transaction Norms

In a significant move aimed at streamlining compliance and fostering a more pragmatic regulatory environment, the Securities and Exchange Board of India (SEBI) has released a consultation paper proposing a major overhaul of its guidelines for Related Party Transactions (RPTs). The proposed changes, which introduce a turnover-based, graded approach to determine the materiality of RPTs, are set to provide substantial relief to large corporations and are a notable departure from the previous “one-size-fits-all” framework.

Moving Beyond the “One-Size-Fits-All” Approach

Under the current regulations, an RPT is considered “material” if it exceeds ₹1,000 crore or 10% of the company’s annual consolidated turnover, whichever is lower. This has often been cited by industry players as an onerous burden, particularly for large, high-turnover companies where even a multi-billion dollar transaction might not be significant relative to their overall scale of operations. The new proposal seeks to address this by introducing a tiered system that links the materiality threshold directly to a company’s turnover.

The proposed framework outlines three distinct categories for listed entities:

• Turnover up to ₹20,000 crore: The existing rule of 10% of the annual consolidated turnover remains in effect.
• Turnover between ₹20,001 crore and ₹40,000 crore: The materiality threshold is proposed to be ₹2,000 crore plus 5% of the amount exceeding ₹20,000 crore.
• Turnover above ₹40,000 crore: The threshold would be ₹3,000 crore plus 2.5% of the turnover above ₹40,000 crore, with an upper ceiling of ₹5,000 crore.

This calibrated approach is designed to ensure that regulatory scrutiny is focused on transactions that are truly material to a company’s financial health and that the compliance burden does not disproportionately impact large enterprises. According to SEBI’s own analysis, if these new thresholds were in place, approximately 60% of RPTs by the top 100 listed firms in the last two fiscal years would not have required shareholder approval.

Key Highlights of the Proposed Relaxations

Beyond the revised materiality thresholds, SEBI’s consultation paper also includes several other key proposals aimed at simplifying the RPT framework:

• Relaxation for Smaller Transactions: The regulator has proposed a significant change for low-value RPTs. Transactions below a certain value—specifically, those not exceeding 1% of the listed entity’s annual consolidated turnover or ₹10 crore, whichever is lower—will only require minimal information to be furnished to the audit committee and shareholders. This is a substantial relaxation of the current, more detailed disclosure requirements for all transactions.
• Clarification on Subsidiary RPTs: The proposals also address RPTs undertaken by subsidiaries of listed companies. The new rules recommend that an RPT by a subsidiary worth over ₹1 crore will require prior approval from the listed parent company’s audit committee if it crosses certain limits, thereby strengthening oversight.
• Validity of Omnibus Approvals: SEBI has also sought to formalize the validity period for “omnibus approvals” granted by shareholders for RPTs. Under the new proposals, approvals granted at an Annual General Meeting (AGM) would be valid until the next AGM, subject to a maximum period of 15 months. Approvals from any other general meeting would be valid for up to one year.

Balancing Ease of Business with Investor Protection

The proposed changes are a reflection of SEBI’s evolving regulatory philosophy, particularly under the new leadership. The focus appears to be on shifting from a purely procedural approach to one that prioritizes “honest” and “optimal” disclosure. By easing the compliance burden for routine or smaller RPTs, SEBI aims to enhance operational agility for companies while ensuring that significant, potentially risky transactions remain subject to rigorous scrutiny and minority shareholder approval.

While the move has been largely welcomed by the corporate sector for its potential to reduce administrative costs and timelines, it also raises important considerations regarding investor protection. The challenge for SEBI and the industry will be to strike a delicate balance: ensuring that the relaxed norms do not compromise the rights of minority shareholders or create new avenues for a lack of transparency. The public consultation period, which is currently underway, will be crucial in shaping the final regulations, and it is expected to generate a wide range of feedback from stakeholders, including investors, legal experts, and industry bodies.