SEBI Reforms RPT Framework: PKPK & Partners Advisory on LODR Fifth Amendment, 2025

The Securities and Exchange Board of India (SEBI) has introduced the Listing Obligations and Disclosure Requirements (LODR) Fifth Amendment Regulation, 2025, significantly overhauling the Related Party Transaction (RPT) framework under Regulation 23. These reforms are driven by the need to introduce scale-based compliance for large-cap entities while strengthening oversight at the subsidiary level.

Listed entities must immediately review and align their RPT Policies and internal controls with these new mandates.

1. Scale-Based Materiality Thresholds (Reg. 23(1) read with Schedule XII)

The most significant change is the move away from the “one-size-fits-all” approach to a scale-based threshold for determining Material RPTs that require shareholder approval.

The amendment replaces the simpler threshold of ₹1,000 crore or 10% of turnover (whichever is lower) with a tiered structure based on the listed entity’s Annual Consolidated Turnover:

Key Compliance Note: The term “last audited financial statements” (i.e., March 31, 2025) must be used for computing this threshold for transactions approved during FY 2025-2026.

2. Tighter Oversight on Subsidiary RPTs (Reg. 23(2))

The amendments significantly tighten the requirements for RPTs where the listed entity is not a party, but its subsidiary is.

Revised Audit Committee Approval Threshold

Any RPT exceeding ₹1 crore at the subsidiary level now requires prior approval of the listed entity’s Audit Committee (AC) if the transaction value exceeds the LOWER of:

1. 10% of the annual standalone turnover of the subsidiary (based on its last audited financial statements); OR

2. The material RPT threshold of the listed parent entity determined under the new Schedule XII.

New Subsidiaries: Valuation for Newly Incorporated Entities

For subsidiaries that do not have audited financial statements for at least one year, the AC approval threshold is based on the LOWER of:

1. 10% of the aggregate value of paid-up share capital and securities premium account of the subsidiary (computed no older than three months prior to seeking approval); OR

2. The material RPT threshold of the listed entity determined under Schedule XII.

Impact: This harmonization ensures that the subsidiary’s significant transactions (especially those of newly incorporated units) are subject to the same rigorous oversight as the parent company’s material transactions.

3. Formalizing Omnibus Approvals (Reg. 23(4))

Provisions relating to the validity of omnibus approvals, previously contained in circulars, are now incorporated directly into Regulation 23(4):

• AGM Approvals: Valid until the date of the next AGM, but not exceeding fifteen months.

• Other General Meetings (EGM/Postal Ballot): Valid for a period not exceeding one year.

4. Other Key Clarifications

• Retail Purchase Exemption: The exemption for retail purchases is narrowed. It now applies only to Directors or Key Managerial Personnel (KMPs) and their relatives for retail purchases, provided the offer is uniform. The term “employees” has been explicitly deleted from the exemption scope.

• Listed Holding Company Clarification (Reg. 23(5)): An explanation confirms that the exemption for transactions between a holding company and its wholly-owned subsidiary (WOS) only applies if the holding company is listed (the “listed holding company” clarification).

PKPK & Partners’ Action Plan for Compliance

In light of these significant amendments, PKPK & Partners advises the following immediate actions:

1. RPT Policy Review: Immediately review and amend your company’s RPT Policy to integrate the new scale-based thresholds (Schedule XII) and the revised subsidiary approval requirements.

2. Threshold Calculation: Ensure the AC and Secretarial team are trained on the correct computation of the new thresholds using the last audited financials (March 31, 2025).

3. Subsidiary Monitoring: Implement enhanced controls to monitor RPT values at the subsidiary level, particularly for newly formed subsidiaries, to ensure timely Audit Committee approval at the listed parent level.

4. Existing Approvals: All RPTs approved by the AC prior to the notification date may proceed under the earlier regime for shareholder approval, but all subsequent transactions must adhere to the revised materiality thresholds.