SEBI Revamps Related Party Transaction Rules with Scale-Based Framework

Key Highlights

• SEBI links RPT rules to company turnover instead of a one-size-fits-all framework.

• The move is aimed at reducing compliance burden for listed entities.

• RPTs involve transactions between a listed company and its subsidiaries or related parties.

• Proper disclosure of RPTs is critical for corporate governance and shareholder protection.

• New rules mark a shift from uniform disclosure to turnover-based compliance.

Introduction

The Securities and Exchange Board of India (SEBI), the country’s capital markets regulator, has introduced a major revamp in the framework governing Related Party Transactions (RPTs). In a significant move, SEBI has shifted from its earlier one-size-fits-all disclosure approach to a scale-based framework. This new structure will link the rules for determining RPTs to the annual consolidated turnover of listed companies, effectively making compliance requirements proportional to company size.

The regulatory change is expected to lighten the compliance burden on listed entities while maintaining robust checks to ensure transparency and protect minority shareholders.

Also Read: Elon Musk Buys $1 Billion Worth of Tesla Shares, Boosting Investor Confidence

What Are Related Party Transactions?

A Related Party Transaction (RPT) refers to any transaction entered into between a listed company and its related parties, including subsidiaries. The SEBI framework defines RPTs broadly to include any agreement, contract, or arrangement carried out by a listed entity with the intention of benefiting a related party.

This can include:

• Deals between the parent company and subsidiaries.

• Transactions designed to transfer benefits directly or indirectly to promoters or related entities.

The importance of RPTs lies in the fact that these transactions can directly affect the financial health of a company and may influence shareholder value.

Why Disclosure of RPTs Is Important?

Disclosure of related party transactions is a cornerstone of good corporate governance practices. Since these transactions involve entities that are connected to the company, they may give rise to conflicts of interest.

There have been past cases where RPTs were misused to:

• Inflate accounts artificially.

• Benefit promoters or a specific set of shareholders at the cost of others.

Therefore, clear disclosures and transparent processes are essential. Proper checks ensure that RPTs are not merely instruments for transferring wealth but are genuinely aligned with the company’s and its shareholders’ long-term interests.

By mandating disclosure, SEBI ensures that all shareholders—including minority investors—are aware of such dealings and can hold companies accountable.

The Shift in SEBI’s Framework

Until now, SEBI has followed a uniform, one-size-fits-all approach for determining RPTs and their disclosure requirements. This meant that companies, regardless of their scale, had to follow the same compliance rules.

However, under the new framework, SEBI has adopted a scale-based approach. The criteria for identifying and disclosing RPTs will now be linked to the annual consolidated turnover of companies. This change introduces proportionality into compliance, meaning larger companies will face stricter disclosure norms, while smaller companies will have relatively lighter requirements.

Impact of the New Rules

The revamped framework is expected to deliver several benefits:

1. Reduced Compliance Burden: Smaller listed entities will no longer be forced to follow disclosure norms designed for much larger firms. This reduction in regulatory pressure allows them to allocate resources more efficiently.

2. Balanced Oversight: Larger companies, which typically engage in more complex and high-value transactions, will continue to face detailed scrutiny, ensuring that corporate governance remains robust.

3. Improved Corporate Governance Standards: By tailoring RPT rules to company size, SEBI seeks to enhance transparency while simultaneously encouraging compliance, thereby improving investor confidence.

Why SEBI’s Decision Matters?

The decision by SEBI’s board represents more than just a regulatory tweak. It reflects an evolving philosophy in Indian corporate governance, where regulation is moving away from blanket approaches and becoming more nuanced and contextual.

For investors, the decision signals that the regulator is attentive to the needs of both large corporations and smaller listed entities. The framework strikes a balance between ensuring transparency and avoiding overregulation that could stifle smaller companies.

Investor Perspective on RPTs

From an investor standpoint, disclosures on related party transactions are critical. They allow investors to evaluate whether the company’s management is making decisions that benefit the broader shareholder base or simply favor insiders.

While SEBI’s new framework eases the compliance load for smaller firms, the fundamental principles of transparency and accountability remain intact. For larger companies, the rules still ensure rigorous checks that protect shareholder value.

The Way Forward

With the new rules, SEBI has laid the foundation for a more flexible regulatory system that adapts to company size and scale. The scale-based model could also serve as a blueprint for other aspects of corporate regulation in India, offering a balance between oversight and business ease.

For listed entities, the immediate task will be to understand how their annual consolidated turnover influences their reporting obligations under the revised RPT norms. Compliance departments and boards will need to align their internal governance systems accordingly.

For shareholders and investors, the expectation is that disclosures will remain transparent, accurate, and timely, thereby safeguarding their interests while enabling companies to focus on growth.

Conclusion

The Securities and Exchange Board of India’s decision to revamp the framework for Related Party Transactions marks a significant regulatory shift. By linking RPT rules to the turnover of listed companies, SEBI has effectively moved away from its earlier uniform approach and adopted a scale-based model.

This change is designed to reduce compliance burdens for smaller firms while maintaining strict standards for larger companies. At its core, the move strengthens the principles of corporate governance and investor protection, ensuring that all stakeholders—especially minority shareholders—remain protected from potential misuse of related party transactions.

Click here to explore:
FII DII Data
Gift Nifty