SEBI Proposes Scale-Based Thresholds for RPTs: Consultation Paper Aims to Balance Oversight and Flexibility

Introduction: A New Lens on Related Party Transactions

In a move that could reshape corporate governance norms, the Securities and Exchange Board of India (SEBI) has released a fresh consultation paper proposing amendments to the regulatory framework governing Related Party Transactions (RPTs). Announced on August 4, 2025, the paper introduces a scale-based threshold mechanism for seeking shareholder approval on material RPTs. The proposal is part of SEBI’s ongoing efforts to enhance transparency while reducing compliance burdens for smaller entities.

Key Highlights from the Consultation Paper

- SEBI proposes scale-based thresholds for shareholder approval of material RPTs
- Thresholds to be linked to company size and transaction value
- Aims to reduce compliance load for smaller listed entities
- Consultation paper open for public feedback until August 31, 2025
- Final amendments expected to be notified by Q4 FY26

Understanding the Scale-Based Threshold Proposal

- SEBI suggests that materiality thresholds for RPTs should vary based on market capitalization and net worth
- For large-cap companies, the threshold may remain at 10 percent of annual consolidated turnover
- For mid- and small-cap entities, thresholds could be relaxed to 15–20 percent depending on financial metrics
- The proposal seeks to ensure proportional oversight without stifling operational flexibility

Rationale Behind the Amendments

- Current one-size-fits-all threshold creates undue burden on smaller companies
- SEBI aims to align RPT norms with global best practices and proportionality principles
- The move is expected to encourage better compliance and reduce procedural delays
- Stakeholder feedback from industry bodies and proxy advisors influenced the proposal

Additional Provisions Under Review

- SEBI may mandate enhanced disclosures for RPTs involving promoter groups
- Audit committees to receive certification from key management personnel on fairness of terms
- Valuation reports from independent parties to be made accessible via QR codes and web links
- Relaxation in peer comparison requirements for royalty-related RPTs also under consideration

Implications for Listed Entities and Investors

- Companies will need to reassess internal thresholds and approval workflows
- Smaller firms may benefit from reduced shareholder approval requirements
- Institutional investors likely to welcome differentiated oversight based on risk exposure
- Proxy advisory firms may revise voting guidelines in response to new norms

Industry Sentiment and Next Steps

- Early reactions from corporate governance experts suggest cautious optimism
- Some concerns remain over potential loopholes in promoter-linked transactions
- SEBI has invited comments from stakeholders including listed companies, investors, and legal experts
- Final rules will be shaped by public feedback and may include transitional provisions

Conclusion: A Step Toward Smarter Governance

SEBI’s consultation paper marks a thoughtful shift in India’s regulatory approach to related party transactions. By introducing scale-based thresholds, the regulator aims to strike a balance between rigorous oversight and operational flexibility. As stakeholders weigh in, the final framework could set a precedent for nuanced, risk-based governance in India’s evolving capital markets.

Source: Economic Times