Kalyani Kaushik & Khushi Jain
Source: Reuters
Abstract: This article examines evolving materiality standards in related party transactions, tracing shifts triggered by the Fifth Amendment and the Linde ruling, redefining disclosure thresholds. Despite these reforms, significant gaps persist. The piece proposes a dynamic, context-sensitive framework to address remaining inadequacies, balancing regulatory precision with stakeholder protection in corporate governance.
I. Introduction
The current state of Related Party Transactions (RPTs) in India stands at a crucial juncture. The recent notification of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations on 19th November, 2025, followed by Securities Appellate Tribunal’s (SAT) transformative ruling in Linde India Ltd. v. SEBI, has signalled a turning point in the evolution of SEBI’s RPT governance framework. A combined reading of these developments reflects a conscious shift, moving away from a stringent compliance-based system towards a scale-based substantive framework that aims to mirror the complex reality of the Indian corporate structure.
RPT’shave been precisely defined in Regulation 2(1)(zc) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as a transfer of resources, services or obligations between a listed entity or its subsidiaries and any other related party. In practical terms, these dealings promote strategic alignment and operational effectiveness within intricate groups through close connection with the contemporary corporate structure. However, governance issues have been a major concern. The possibility of value diversion from minority to the controlling stakeholders through opaque transactions shadows its functional necessity.
The notion of materiality occupies a central place within this framework, a threshold process that triggers when an RPT necessitates enhanced scrutiny through audit committee regulation, shareholder authorisation, and amplified disclosure requirements. Predominantly characterised by numerical thresholds, this idea fails in capturing the complex economic realities of today’s commercial world. The recent regulatory amendments and SAT’s judicial pronouncement are indicators of a progressive reassessment within the SEBI’s framework, prompting a fundamental question, whether materiality has evolved into an effective governance tool capable of preventing value diversion, or has it become an overly mechanical instrument that inadequately accounts for transactional context and commercial substance. This article undertakes an analytical approach in examining these developments through an enhanced understanding of these amendments and deeper insight into the judgment.
II. SEBI LODR Amendment and Materiality Recalibration
The SEBI (fifth amendment) Regulation, 2025, notified on 19th November, 2025, recalibrated the determination of ‘material’ RPTs under Regulation 23(1) read with Schedule XII. Before the amendment, transactions above ₹10,000 Crore or 10% of consolidated turnover required shareholder approval, which established a consistent threshold for determining materiality. Addressing the concerns raised in SEBI’s Consultation Paper on the Review of the RPT Framework over the disproportionate compliance costs imposed on large conglomerates, the Fifth Amendment replaces this flat threshold with a graded, turnover-linked materiality framework.
The 10% threshold continues to apply for the listed entities with a consolidated turnover of up to ₹20,000 crore. For larger entities, materiality is computed through a formula combining a fixed base amount with a progressively declining percentage of incremental turnover. This restructuring gives effect to the consultation paper’s stated objective of correlating governance scrutiny with the relative magnitude of the listed firm.
Additionally, the amendment also modifies the oversight at the subsidiary level. A related-party transaction carried out by a subsidiary that surpasses 10% of either the subsidiary’s standalone turnover or the parent’s applicable materiality threshold, whichever is lower, is subject to audit committee approval of the listed parent under the amended Regulation 23(2) of the LODR Regulations. This mechanism closes a potential loophole, i.e., companies cannot avoid oversight simply by conducting related-party transactions through a subsidiary with high turnover.
Additionally, in accordance with SEBI’s changing regulatory strategy, the disclosure regime has experienced a graded adjustment. SEBI exempted the disclosure requirements for transactions below ₹1 Crore through the circular dated 26 June 2025. In furtherance of that, with respect to the changes proposed under Annexure 2 of the consultation paper, a tiered disclosure framework is introduced by the SEBI (5th amendment) Regulation, 2025. Simplified disclosure requirements apply to transactions exceeding ₹1 crore but staying below 1% of turnover or ₹10 crore, whichever is lower. Transactions under ₹1 crore are being exempted from disclosure.
III. Linde India Ltd. v. SEBI: Materiality and Aggregation
By addressing whether materiality under Regulation 23 of the LODR Regulations should be assessed transaction-wise or based on cumulative transactions over the financial year, the SAT in Linde India Ltd. v. SEBI (2025) delivers essential clarity to SEBI’s materiality regime.
The Tribunal upheld the notion of verifying related-party dealings over the years, discarding the Linde India’s plea to consider each contract on its own. The Tribunal held that the approach of considering each contract in isolation would defeat the purpose of the regulation contained in Schedule XII, as it would encourage the deliberate segmentation of economically significant transactions into parts which fall below the requisite level of materiality to escape the radar of shareholders as well as that of the audit committee.
RPT regulations are designed to protect minority shareholders from ‘tunnelling’, i.e., the diversion of company value to controlling shareholders or promoters. Materiality thresholds serve as a safeguard, ensuring that transactions large enough to affect the company trigger oversight. If companies could fragment a single economic arrangement into multiple contracts, each falling below the threshold, this safeguard would be weakened. The Linde India ruling addresses this concern. Hence, consistent with the legislative priority to shield minority shareholders against diversion of system-wide value, this ruling creates a more robust, anti-circumvention interpretation of materiality.
IV. Analytical Examination of the Framework
While the Fifth Amendment by SEBI and the SAT’s ruling is a major step in the governance of RPT, a close analytical scrutiny shows that the structure still has a lot to be desired in the effectiveness of the framework.
- Over-Reliance on Quantitative Materiality as a Governance Metric
The continued reliance on turnover-based thresholds reflects an inherent limitation. While on the surface, the materiality framework built upon revenue percentages is construed as an objective metric, it carries an inherent neglect of the critical aspects of economic impact, including profitability, cash flows, competitive positioning, and strategic influence within the market. This inadequacy manifests itself on a clearer note when considering profitability impact scenarios. A single transaction with a consolidated turnover of 8% of can be classified immaterial as per Schedule XII and still create a very large percentage of operating profit, significantly impacting shareholder returns. On the other hand, a high-value transaction with a 12% turnover might comprise economically neutral cost-sharing arrangements with fewer implications on governance.
Most jurisdictions around the world appreciate this restriction. The United Kingdom stands as a critical & particularly relevant reference point in this regard, as the Indian regulatory structure has drawn conceptual significance from its relationship with common law jurisdictions including UK, especially in areas of corporate governance, and investor protection. The UK Listing Rules apply multi-metric methods with gross assets tests, tests of consideration and tests of profit to a variety of transactions. Additionally, Regulation 30 of the SEBI LODR takes a principle-based multi-metric test of net worth, turnover and profit or loss after tax to determine materiality of general corporate events. The governing principle underlying this framework focuses on economic significance of a transactions and its consequential impact on investors, rather than mere mechanical uniformity. This lack of consistency is intrinsic within the regulatory framework of SEBI, pointing towards the necessity of harmonization.
A better approach will focus on assessing materiality in a comprehensive manner with regard to the percentage change in operating profit or EBITDA as well as turnover limits. Operating profit and EBITDA are more closely aligned with economic importance as they reflect the company’s ability to generate sustainable earnings from its core operations. These measures reflect efficiency, margins, and the company’s ability to generate sustainable earnings. Investors, lenders, and market analysts often rely on operating profit and EBITDA to assess a company’s financial health and value. Therefore, if a related party transaction significantly affects these metrics, it is likely to have a real impact on shareholder value, even if turnover figures do not appear significant. Hence, a multi-factor approach involving quantitative thresholds and qualitative measures, including strategic importance and competitive impact, would be more in line with materiality decisions based on actual economic importance.
- The ₹1 Crore Non-Disclosure Threshold as a Regulatory Blind Spot
The blanket exemption from disclosure requirements for RPTs below 1 crore creates a concerning governance void. Although this threshold was intended to ease compliance in the case of de minimis transactions, it resulted in the sub-optimal effect of creating multiple sub-threshold dealings for systematic value extraction and splitting of transactions. The lack of visibility of the recurring low-value RPTs in the audit committees denies the opportunity to discharge oversight roles and detect the emerging patterns that may suggest abuse.
A sensible approach would retain the ₹1 crore cap on disclosure of shareholders to the public and require periodic consolidated reporting to the audit committees. China’s Accounting Standard for Enterprises No. 36 offers a useful reference in this context. It mandates disclosure of transaction amounts and terms by related party, permitting aggregation only for similar transactions, analysing their nature and types. This reflects a core principle of prioritizing the complete picture over arbitrary thresholds. A modified implementation of this framework would require aggregation of RPT’s below 1 Cr and quarterly reporting to audit committees, with the management commenting on the rationale of its transactions and verifying their fairness through arm-length pricing. Application of this principle would allow audit committees to review the comprehensive picture they currently lack, and to identify patterns which individual transactions would never reveal. This model bridges the existing gap by ensuring that oversight is driven by economic substance rather than arbitrary numerical cut-offs.
- Over-Aggregation Mandate and Loss of Transactional Context
The SAT’s requirement for aggregation of transactions over the entire financial year is effective in preventing companies from breaking large transactions into smaller components to avoid breach of regulatory thresholds. However, it gives rise to practical difficulties. Through mandatory aggregation of all transactions with a related party, irrespective of commercial purpose, the framework treats economically distinct transactions as a single composite arrangement. It may lead to grant of shareholder approval for a combination of transactions that exceeds the materiality threshold, even though each individual transaction was conducted at arm’s length and arose in a different commercial context.
A contextual approach of aggregation might yield better governance outcomes. This involves the implementation of a structured evaluative framework, that aims to categorise transactions wherein they (i) pursue a common commercial objective, (ii) occur within a proximate time frame suggesting coordination, or (iii) exhibit operational or economic interdependence. Additionally, the framework would mandate submission of a reasoned note by the management to the audit committee, demonstrating the satisfaction of relevant indicators, with the committee recording its basis for determining aggregation or non-aggregation.
This mechanism would preserve the anti-circumvention rationale endorsed by the SAT, while allowing economically distinct transactions, supported by documented commercial justifications to be assessed independently. By introducing defined indicators and recorded oversight, the approach would prevent both deliberate fragmentation and over-inclusive aggregation.
V. Way Forward
SEBI’s fifth amendment indicates a radical departure towards minority-based governance, marked by a shift from formalistic compliance to substantive protection. The scaled materiality thresholds mandated under Schedule XII are rooted in commercial realities of large corporate entities and provide for appropriate regulatory oversight. The SAT’s judgment strengthens regulatory trust and validates the SEBI’s aggregation policy, setting a solid precedent against organized avoidance.
However, arithmetic thresholds cannot be the sole criterion of governance. Aspects beyond quantitative measurements shall be included in true materiality. This requires regulatory changes in disclosure requirements and transaction aggregation for improving contemporary situations. With these amendments, SEBI’s framework will further assist in safeguarding minority interests and provide flexibility to lawful business operations.
Kalyani Kaushik is a second-year law student at Hidayatullah National Law University
Khushi Jain, second year law student at Hidayatullah National Law University.