[Opinion] SEBI’s New RPT Framework – Turnover-Linked Thresholds and Stronger Subsidiary Controls

Adv. Shivam Chaudhary & Harsh – [2025] 181 taxmann.com 844 (Article)

1. Introduction

Corporate governance in India has long grappled with the complex reality of Related Party Transactions (RPTs). While RPTs are often necessary for operational efficiency—allowing groups to leverage synergies and economies of scale—they simultaneously present the most significant risk for the expropriation of minority shareholder wealth. The challenge for the regulator has always been to distinguish between abusive tunnelling of funds and legitimate business exchanges.

In a decisive move to calibrate this balance, the Securities and Exchange Board of India (SEBI) has recently amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015(LODR Regulations). These amendments represent a paradigm shift from a “one-size-fits-all” approach to a more nuanced, scale-sensitive framework. By introducing a turnover-linked, slab-based materiality threshold under the newly added Schedule XII, and by tightening the noose around indirect RPTs routed through subsidiaries, SEBI has signalled that substance will prioritise over form. This article analyses the implications of these amendments, examining how the transition to proportional governance impacts the compliance landscape for India Inc.

2. The Death of the Fixed Threshold – Analysing Schedule XII

Under the erstwhile regime, the determination of a “material” RPT—which triggers the requirement for shareholder approval—was often a point of contention. Previously, a transaction was considered material if it exceeded 10% of the annual consolidated turnover of the listed entity. Subsequently, absolute monetary thresholds (such as Rs 1,000 crore) were introduced to capture high-value transactions of large conglomerates that might otherwise slip under the 10% radar.

However, fixed monetary thresholds suffered from a binary flaw: they were either too high to protect shareholders in smaller entities or too low for mega-corporations, resulting in a clutter of procedural compliances for routine operational transfers. The recent amendment replaces this rigid structure with a slab-based mechanism introduced in Schedule XII of the LODR Regulations. This change acknowledges that “materiality” is relative. A Rs 50 crore transaction might be negligible for a Nifty 50 company but existential for a small-cap entity.

By linking thresholds to specific turnover slabs, SEBI ensures that the governance burden scales with the size of the entity. For smaller companies, lower thresholds ensure that even moderate leakage of funds is scrutinised by shareholders. Conversely, for larger entities, the slabs prevent the Audit Committee and shareholders from being inundated with approval requests for transactions that, while large in absolute terms, are statistically insignificant relative to the company’s balance sheet.

This analytical shift aligns Indian governance with global best practices, where materiality is viewed as a function of risk and scale rather than an arbitrary number. It forces the Audit Committee to assess transactions not just on their face value, but on their relative impact on the company’s financial health.

3. Piercing the Veil – The Subsidiary Trap

One of the most profound aspects of the recent amendments is the tightening of norms regarding subsidiaries. Historically, promoters have often utilised the complex webs of holding and subsidiary companies to obfuscate the trail of transactions. A listed entity might divert funds to a subsidiary, which would then transact with a related party, effectively bypassing the approval mechanisms of the listed parent company.

The amendments dismantle this loophole by refining the approval norms for RPTs undertaken through subsidiaries. The regulator has introduced a bifurcation based on the reliability of financial data – separate thresholds now apply for subsidiaries with audited financials versus those without.

For subsidiaries without audited financials—often the opaque vehicles used for financial engineering—the thresholds for triggering parent-level approval are significantly stricter. This forces listed entities to either maintain higher standards of financial reporting for their subsidiaries or face the scrutiny of the listed entity’s shareholders.

Furthermore, the amendments clarify the triggers for approval. It is no longer sufficient for the subsidiary’s board to sign off on a transaction. If the value of the RPT exceeds the prescribed threshold under the new framework, it triggers a requirement for approval from the Audit Committee, the Board, or the shareholders of the listed entity itself.

This effectively pierces the corporate veil for the purpose of governance. It recognises that the economic interest of the shareholder in the listed parent extends to the assets held by the subsidiary. As noted in various judicial precedents, including Vodafone International Holdings BV v. Union of India, the legal independence of a subsidiary does not preclude the economic reality of control. SEBI’s amendments operationalise this economic reality into regulatory compliance.

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