By Prasenjit Chakrabarti & Brijesh K Mishra, The writers are associate professors at Indian Institute of Management, Ranchi
Related-party transactions (RPTs) occupy a governance grey zone: they can make businesses run more smoothly, but they can also become vehicles for expropriating minority shareholder wealth, a practice known as tunnelling. To curb tunnelling risks, the Securities and Exchange Board of India (Sebi) has increasingly enforced the requirement of a material transaction—an RPT with a related party that crosses a prescribed value threshold and must therefore be placed before shareholders for approval.
Post-Satyam, India steadily tightened oversight—from the Companies Act, 2013, to Sebi’s 2015 Listing Obligations and Disclosure Requirements norms and the 2021 rule which treated any RPT above Rs 1,000 crore or 10% of the turnover as material. This uniform threshold of Rs 1,000 over-regulated routine intra-group flows of large firms. Sebi’s 2025 proposal introduces scale-based thresholds instead: 10% of turnover for firms up to Rs 20,000 crore; Rs 2,000 crore plus 5% of the turnover above that level up to Rs 40,000 crore; and for the largest firms, Rs 3,000 crore plus 2.5% above Rs 40,000 crore, capped at Rs 5,000 crore.
The goal is to preserve investor protection while replacing a blunt, one-size-fits-all regime with a more proportionate framework. The intent may be pragmatic, but the empirical evidence shows why we must tread carefully.
To see how the changed rules play out in practice, we adopted a classification widely used in academic research, separating RPTs into “business RPTs” (routine operational exchanges) and “opaque RPTs” (financial transfers, loans, and advances—the usual vehicles for tunnelling, especially with promoters, directors, family members of the firm). We then examined how these two categories behaved across two revenue tiers (< Rs 20,000 crore and > Rs 40,000 crore) under the old rule (the strict Rs 1,000-crore threshold) and the new rule (scale-based regime) in the last three fiscal years. The estimation highlights a striking divergence in corporate behaviour among large firms (> Rs 40,000 crore revenue).
The table tells a compelling story of discipline versus disruption. First, with business RPTs across the two categories, the material figures remain relatively stable between the old and new rules. For the largest firms (revenue > Rs 40,000 crore), business transactions in FY25 shifted marginally from Rs 39,90,000 crore to Rs 36,39,000 crore. This indicates that the strict regulation did not significantly disrupt genuine commerce. Operational necessities continued, despite the compliance friction, and that pattern has held steady across the years.
Now contrast this with Opaque RPTs for the largest firms. Here, the old rule acted like a powerful brake. In FY25, under the old norms, opaque transactions were worth Rs 425,000 crore; under the new rule, that figure collapses to Rs 238,000 crore—a staggering 44% drop. Similar declines appear in FY23 and FY24. The message is clear: the old regime compelled large firms to curtail questionable financial transfers, particularly those made to promoters, key shareholders, and directors. But the new scale-based rule changes that calculus. A significant portion of insider-linked transactions that once fell squarely under the Rs 1,000-crore shareholder approval threshold now slips entirely outside the net.
Conversely, for smaller firms (< Rs 20,000 crore), both business and opaque RPTs showed no meaningful change under either regime, remaining largely unaffected by the shift from the old rule to new. This brings us to the central risk of Sebi’s proposed scaled regime. The intent to ease compliance is sensible for business RPTs, but the data shows that it was the absolute Rs 1,000-crore threshold that effectively restrained opaque RPTs in large firms. Raising that bar to as much as Rs 5,000 crore for a Rs 50,000-crore company shifts the equilibrium sharply, substantially reducing the likelihood that insider-linked transactions come under shareholder scrutiny. This shift matters because India’s largest firms—often too big to fail and dominated by powerful promoter groups—operate in an environment where shareholder activism remains relatively weak. When institutions hesitate to challenge promoters and minority investors lack collective strength, materiality thresholds become the only reliable brake on tunnelling.
Loosening them risks reviving the very opacity that enabled the Satyam scandal, where “routine” transactions masked massive diversion. Satyam taught us a simple lesson: when oversight retreats, abuse advances. A scaled regime must not recreate those blind spots.
Regulation must be as nuanced as the data. We propose a bifurcated approach:
For business RPTs: Adopt the scaled, turnover-based threshold. Facilitate ease of doing business for genuine operational needs.
For opaque RPTs: Retain the strict Rs 1,000-crore threshold for transactions like financial transfers, loans, and advances to promoters, directors, and their families—these transactions carry higher agency costs and demand tighter leashes.
As India Inc scales, our governance must become more sophisticated, not merely more lenient. We must facilitate business, but we must not subsidise opacity. The data is clear: strict rules work where they are needed the most. Let us not discard them wholesale.