Static to Scale: Decoding the Fifth Amendment to SEBI (LODR) Regulations

Introduction

The Securities and Exchange Board of India (“SEBI“) has recently amended its Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 through its Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2025. These amendments have been made in the backdrop of the consultation paper issued in August 2025. The SEBI has progressively recast the Related Party Transactions (“RPT”) Framework by amending Regulation 23 and Schedule XII of the Regulations. The transition of the regulatory framework is marked from a rigid transaction centric model to one that is dynamic, scale-based regime. SEBI has tried to address the persistent corporate governance failures that arise from promoter-dominated market, indirect self dealing and misuse of subsidiaries to circumvent disclosure and legal approvals. They adopt a substance over form approach by expanding the scope of RPTs, strengthening Audit Committee oversight and minority shareholder protection. However, one must question whether the Fifth Amendment does in effect makes a genuine governance advance or is merely another regulatory attempt to address persistent governance failures.

Flip Side of RPTs

The paradoxical position occupied by RPTs in corporate regulation stems from their ability to generate operational efficiency, reduce transaction costs and facilitate business synergies within complex corporate structures. On the flip side, these transactions may also become instruments for “tunnelling”- allowing controlling shareholders to get private benefits at the expense of minority shareholders. Hence, regulation of RPTs assumes critical importance in ensuring transparency, accountability and minority shareholder protection.

The amendments to Regulation 23 of the SEBI (LODR) Regulations, 2015 has largely been reactive to the loopholes created by promoters catalysed by corporate scandals like Satyam Scandal (2009), IL&FS Crisis (2019) and CG Power & Industrial Solutions (2019). Earlier, Regulation 23 adopted a largely transaction centric approach wherein materiality was determined using a static threshold. Therein, transactions exceeding INR 1,000 crore or 10% of the annual consolidated turnover, whichever lower were deemed material and required shareholder approval. This proved inadequate especially for large conglomerates that saw this standard as overly restrictive and also hindered their routine commercial arrangements and increased compliance friction. On the other hand, this threshold proved to be overly permissive for small listed entities allowing significant value transfers to escape shareholder scrutiny.

Hence, the amended one-size-fits-all approach reduces shareholder approval burden and retains the Rs.5,000 crore upper cap to protect minority shareholders. The new thresholds could reduce the volume of RPT resolutions by an estimated 60% allowing management to focus on growth rather than routine administrative voting.

The New Materiality Matrix

A significant change brought by the 2025 Amendment is the replacement of this materiality threshold with a more graded, turnover basis framework through the introduction of Schedule XII to the Regulations. Materiality would now be determined based on the consolidated turnover of the listed entity with progressively calibrated thresholds for entities of different scales. The earlier one size fits-all-approach has now been replaced by proportionality into the RPT framework ensuring that regulatory scrutiny aligns with the economic significance of transactions.

 
SEBI has effectively replaced boards’ discretion with quantitative triggers with a more standardized reporting environment. Importantly, one must question whether a size-proportionate framework is also governance-risk proportionate under the current LODR regulations. This materiality threshold suffers from various governance risks in absence of any qualitative filters.

Firstly, the distributional effects of the new thresholds exposes that the framework relaxes scrutiny for mid-sized companies but tightens it for the large conglomerates. The 60% reduction that SEBI projects, flows mostly because of this mid-tier relaxation, raising questions as to whether this framework serves minority shareholders or the promoters of mid-sized listed entities.

To illustrate, for a company with Rs.30,000 crore turnover, materiality would be a transaction of Rs.2,500 crore effectively letting a transaction of Rs.2,000 crore to escape scrutiny. Secondly, in a tiered system, the notch effect, where discontinuous thresholds can create bunching behaviour just below the threshold, could be a regulatory problem over time. In order to curb such risk, SEBI would require a strong review mechanism to identify such unusual clustering of companies just below the Rs.20,000 crore and Rs.40,000 crore tier.

Lastly, the design choice of taking turnover as the sole metric makes certain transactions vulnerable even with identical economic significance across sectors. An Rs 500 crore RPT being executed by a trading firm and an infrastructure company gives different regulatory outcomes because of their business model. For the infrastructure company with ₹3,000 crore turnover triggers mandatory approval at 16.7% although the Rs.500 crore may in reality represent a far smaller proportion of its total asset base therefore posing a proportionally less governance risk. Hence, the current turnover based materiality is sector blind in a way that multi-denominator approach (like the UK Class Test System) would not be.

The Subsidiary Sentinel

The amendment has also expanded the jurisdiction of listed entities over RPTs undertaken by the their subsidiaries even where the listed entity itself is not a party to the transaction. The revised framework introduces differentiated thresholds depending on whether the subsidiary has at least one year of audited standalone financial statements. The subsidiaries would require audit committee approval of the listed entity if the transaction exceeds INR 1 crore and crosses either 10% of the subsidiary’s standalone turnover or the listed entity’s threshold under Schedule XII whichever is lower. For newer subsidiaries, materiality is assessed with reference to paid-up share capital and securities premium. The said mechanism has filled a governance gap by scrutinising the value transfers at the subsidiary level keeping the entire corporate group in check. Through this amendment the SEBI is effectively looking through the corporate veil to prevent any kind of fund diversion through lower tier entities. One may also consider the SEBI investigation into Raymond Ltd. scrutiny where the company did not take Audit Committee approval for RPTs involving the sale of JK House to the promoters at a significantly undervalued price routed through its subsidiaries was flagged by the minority shareholders as a value grab. The new RPT amendment of Rs 1 crore for subsidiary RPTs would ensure that even if a transaction is small for the parent, it is significant for the subsidiary or involves a Related Party then it requires Audit Committee approval. Whereas the IL&FS crisis was a “systemic concealment” where the company used its various subsidiaries to extend loans to related parties and other group companies prompting SEBI to recognise the failure of including transactions made by subsidiaries of listed companies in the definition of RPTs.

International Perspectives

The 2025 Amendment reflects on a broader global trend towards proportionality in the regulatory framework of RPTs. The OECD Guidelines on Corporate Governance emphasize that RPT frameworks should be proportionate to the size of the company. On a similar note, The UK Listing Rules have framed Class Test System that compares transaction size to assets or profits, hence transactions exceeding 5% would be subjected to a shareholder circular and approval. It can be argued that SEBI’s scale based slab system is more sophisticated for large conglomerates against the UK percentage based approach. The UK had chose to boost their markets by abolishing shareholding approval voting for RPTs in favor of a disclosure-based approach. In contrast, the US through its Regulation S-K mandates public disclosure of RPTS that exceed a value of USD 120,000. This is coupled with independent audit committee review under NYSE and NASDAQ listing standards for listed public companies. Section 402 of Sarbanes-Oxley Act of 2002 (SOX) prohibits personal loans to directors and executive officers curtailing potential conflicts of interest. Further Section 404 requires companies to have internal controls on financial reporting including RPTs. The contrast between US and India lies due to their reactive and proactive approaches respectively.

Recommendations

While the international investors may be pleased to see an increased upper cap which would reduce compliances, there still lies some scepticism. The new amendment caps the materiality threshold at Rs.5,000 crore however it may pose risk to transactions that are lower than this yet would not require shareholder approval. In such situations having a Fairness Opinion from a SEBI registered Merchant Banker can be mandated. Many of the companies continue to classify repetitive RPTs as being in the Ordinary Course of Business nature to avoid stricter scrutiny. It is recommended to have a sunset clause for this ordinary course which re-certifies the status of the transactions, this can be done by an external auditor to ensure that previous contracts have not become extraordinary due to changing market conditions. Further for ease of business, the regulatory body may also considering digitalising disclosures by creating digital repositories for companies and conglomerates accessible to the Audit Committee. The role of Tech and AI can go beyond traditional barriers to identify any hidden RPT network operating by employing a pattern recognition algorithm. A move towards XBLR tagging for RPT disclosures to make them machine-readable has already opened the feasibility of this recommendation.