By S&S Co. Advocates & Solicitors · Published 16 October 2026 · Informational content, not legal advice: see our disclaimer
A related party transaction above a certain size cannot simply be approved by a company's management; it needs audit committee approval and, past a materiality threshold, shareholder approval through the listed entity's minority shareholder voting mechanism. Getting the threshold calculation wrong is not a paperwork slip, since a transaction that should have gone to shareholders but did not can be challenged well after the fact, by a minority shareholder or by SEBI itself, with consequences for the transaction and for the directors who approved it.
SEBI notified the Fifth Amendment to the Listing Obligations and Disclosure Requirements Regulations in November 2025, replacing the flat materiality test that had applied since 2021 with a tiered formula under a new Schedule XII, effective from 18 December 2025. This guide sets out what changes, why the old test is no longer adequate for larger companies, and what a listed entity's legal and compliance teams need to redo before the new framework takes effect.
The old test and why it stopped working
Under the materiality framework that applied before this amendment, a related party transaction, or a series of transactions with the same related party over a financial year, was treated as material if it crossed the lower of two figures: one thousand crore rupees, or ten percent of the listed entity's consolidated annual turnover as per the last audited financial statements. For a mid-sized company this threshold was a meaningful check, but for India's largest listed conglomerates, where ten percent of turnover can run into tens of thousands of crores, the flat rupees one thousand crore cap meant nearly every sizeable transaction automatically required shareholder approval regardless of how large the company actually was relative to the transaction.
This produced two opposite problems. Very large companies found almost every significant commercial arrangement with a related party, even a genuinely routine one, getting routed to a shareholder vote, which both slowed commercial decision-making and arguably diluted shareholder attention by making the materiality threshold meaningless as a filter. Smaller and mid-sized companies, conversely, could structure transactions just under the ten percent of turnover mark without ever approaching the rupees one thousand crore cap, keeping genuinely significant transactions for their size out of the shareholder approval requirement.
What the new tiered formula actually does
The Fifth Amendment replaces the flat test with a graded scale tied to the company's own turnover band. For listed entities with consolidated turnover up to twenty thousand crore rupees, the materiality threshold stays linked to ten percent of turnover, broadly similar to before. For entities with turnover between twenty thousand and forty thousand crore rupees, the threshold is calculated as a base of two thousand crore rupees plus five percent of turnover above the twenty thousand crore mark. For entities above forty thousand crore rupees, the threshold is three thousand crore rupees plus two and a half percent of turnover above that level, subject to an absolute ceiling of five thousand crore rupees regardless of how large the company is.
The effect is that as a company gets larger, the materiality threshold grows more slowly in percentage terms, which is the regulator's way of ensuring that even the biggest listed groups cannot escape shareholder scrutiny on transactions that remain commercially significant in absolute rupee terms, while still giving them room to run ordinary-course transactions without a shareholder vote on every sizeable deal.
The new subsidiary-level approval requirement
A separate change under the same amendment requires audit committee approval for related party transactions at the subsidiary level once they cross one crore rupees, assessed against either the subsidiary's own turnover metrics or the newly introduced thresholds, whichever framework the regulation directs the company to apply. This closes a gap that groups with complex subsidiary structures had sometimes used, routing related party arrangements through a subsidiary where the parent-level audit committee had limited visibility and the subsidiary itself had a much smaller governance apparatus around such approvals.
Group general counsel and company secretaries managing multi-subsidiary listed groups should treat this as the more operationally disruptive part of the amendment, since it means building or formalising an approval workflow at subsidiary board and audit committee level that many groups have historically left informal, relying instead on parent-level oversight that this amendment now says is not sufficient by itself.
What stays unchanged
The fundamental definition of what counts as a related party under the Companies Act, 2013 and the LODR Regulations is not altered by this amendment; the change is to the materiality threshold that decides when shareholder approval, as opposed to audit committee approval alone, becomes mandatory. Ordinary-course transactions at arm's length, properly documented as such, continue to enjoy the lighter governance treatment they always have, provided the company can actually substantiate the arm's length characterisation if questioned.
Disclosure obligations to the audit committee itself, including the minimum information that must accompany any related party transaction proposal, continue to apply regardless of whether the transaction crosses the new materiality threshold, so a transaction that falls below the threshold for shareholder approval still needs proper audit committee documentation and is not exempt from governance scrutiny altogether. Companies that had built their internal approval templates around the old flat threshold should check that these templates still reference the right numbers rather than simply assuming the surrounding process is unaffected.
What a company should be doing before 18 December 2025
Every listed entity should recompute its own materiality threshold under the new tiered formula using its latest audited consolidated turnover figure, rather than assuming the old flat test still applies or extrapolating loosely from commentary, since the exact tier a company falls into changes the calculation method entirely. Companies near a tier boundary, close to the twenty thousand or forty thousand crore turnover marks, should pay particular attention, since a transaction that would not have needed shareholder approval under the old flat test could now cross the new, lower threshold depending on where the company sits.
Legal and compliance teams should also review any related party transactions currently in process or under negotiation that are expected to conclude around the effective date, since a transaction structured and approved under the old threshold just before 18 December 2025 but executed after that date could face a question about which framework actually governs it, and err on the side of applying the stricter of the two tests where there is genuine ambiguity about timing.
Rebuilding the subsidiary governance workflow
For groups with multiple subsidiaries, the practical starting point is an inventory: list every subsidiary that regularly enters into transactions with group entities, confirm whether each has a functioning audit committee or equivalent approval mechanism capable of handling the new one crore rupee threshold, and formalise a reporting line so the parent-level audit committee and board actually see subsidiary-level related party activity on a regular cycle rather than learning of it only during statutory audit.
Where a subsidiary does not currently have the governance infrastructure to handle this, standing up a lightweight committee structure now, well before the effective date, avoids a scramble in December and reduces the risk of a transaction slipping through without the newly required approval simply because nobody had assigned responsibility for catching it at the subsidiary level. A short internal circular naming who owns this tracking at each subsidiary is a small step that prevents a much larger governance gap from surfacing only when an auditor or SEBI asks for it.
Frequently Asked Questions
When does the new related party transaction materiality threshold take effect?
The Fifth Amendment to the SEBI LODR Regulations was notified in November 2025 and the new Schedule XII threshold framework becomes effective from 18 December 2025. Companies should recompute their thresholds using their latest audited consolidated turnover figures before that date, particularly if they sit near a tier boundary.
Does the new formula make it easier or harder for large companies to avoid shareholder approval?
Generally harder in absolute terms for very large companies, since the threshold grows more slowly as turnover increases and is capped at five thousand crore rupees regardless of size, closing the gap that let the largest listed groups route very large transactions past the old flat rupees one thousand crore limit.
What is the new subsidiary-level approval requirement?
Related party transactions at the subsidiary level crossing one crore rupees now require audit committee approval assessed against the applicable turnover-based thresholds, closing a gap where such transactions previously had limited formal oversight if the subsidiary's own governance structure was informal.
Does an arm's length related party transaction still need special approval under the new rules?
Genuine arm's length, ordinary-course transactions continue to receive lighter treatment, but the company must still be able to substantiate that characterisation, and normal audit committee disclosure obligations continue to apply regardless of whether the shareholder approval threshold is crossed.
References & Further Reading
The provisions and rulings below were relied on for this guide. The position can change with amendments and later decisions, so check the current text and the latest case law before acting on any of it.
- SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2025, notified November 2025, effective 18 December 2025
- Schedule XII, SEBI LODR Regulations (as introduced by the Fifth Amendment)
- Section 188, Companies Act, 2013 (related party transactions)