Are you struggling with SEBI LODR Regulation 23 compliance? This comprehensive guide covers everything from materiality thresholds to audit committee approvals for Related Party Transactions in 2025.
What is SEBI LODR Regulation 23? Understanding Related Party Transactions
SEBI LODR Regulation 23 is the cornerstone regulation governing Related Party Transactions (RPT) for all listed companies in India. Introduced under the SEBI Listing Obligations and Disclosure Requirements, this regulation prevents corporate fraud and protects minority shareholders from unfair related party dealings.
What is a Related Party Under SEBI LODR Regulations?
SEBI LODR Regulations define a “Related Party” comprehensively to capture all entities and individuals who can influence a listed company’s decisions. Understanding this definition is crucial for RPT compliance.
- Covers all Related Party as defined, under section 2(76) of the Companies Act, 2013 or applicable accounting standards;
- Any person or entity forming a part of the promoter or promoter group of the listed entity;
- Any person or any entity holding 10% or more of the equity shares of listed entity either directly or as a beneficial owner.
For understanding Related Party Transaction under Companies Act, 2013 click here.
What is Related Party Transaction Under SEBI LODR?
Related Party Transaction (RPT) under SEBI LODR means any transfer of resources, services, or obligations between a listed company and its related parties, regardless of whether a price is charged.
Any deal or exchange of money, services, goods, or responsibilities between:
- A listed company or its subsidiaries,
AND - A person or company related to it
OR - Any other person or company, if the deal ends up benefiting someone related to the listed company or its subsidiaries.
It doesn’t matter if money is actually exchanged or not and it can be one deal or a series of deals in a contract.
What is NOT a Related Party Transaction?
The following do not count as RPTs (as long as they follow the rules):
(a) Issuing shares on a preferential basis
— If it follows SEBI rules for share issues.
(b) Common shareholder benefits like:
- Dividends
- Splitting or merging shares
- Giving bonus shares or rights issues
- Buying back shares
— As long as they are given equally to all shareholders.
(c) Taking fixed deposits
— By banks or NBFCs from anyone, including related parties,
— If the terms are the same for everyone and clearly disclosed every 6 months.
(d) Current or savings account deposits
— By banks, if they follow RBI or central bank rules.
— Interest paid on these also included.
(e) Retail purchases by employees or directors
— Like buying company products just like a regular customer,
— Without special business deals, and
— On equal terms offered to all employees/directors.
Why SEBI LODR Regulation 23 Matters for Listed Companies
Before Regulation 23, numerous cases emerged where promoters exploited their positions through:
- Inflated property rentals to related entities
- Overpriced raw material purchases from promoter companies
- Excessive brand usage fees to related parties
- Fund diversions through complex subsidiary structures
SEBI LODR Regulation 23 now serves as the primary defense against such corporate governance violations.
Related Party Transaction Materiality Thresholds Under SEBI LODR 2025
Primary Materiality Test for RPT Compliance
For Regular Listed Companies: A Related Party Transaction becomes material when it exceeds:
- ₹1,000 crores OR
- 10% of annual consolidated turnover
- Whichever is lower
For SME Exchange Listed Companies (Effective April 1, 2025):
- ₹50 crores OR
- 10% of annual consolidated turnover
- Whichever is lower
Special Materiality Threshold: Brand Usage and Royalty Payments
Brand usage and royalty payments have stricter materiality thresholds:
- Only 5% of annual consolidated turnover
This lower threshold reflects SEBI’s concern about fund diversion through royalty payments – a common method for related party transaction abuse.
SEBI LODR Regulation 23: Three-Tier Approval Framework
Tier 1: Audit Committee Approval for Related Party Transactions
Who Approves: Only independent directors on the audit committee Scope: ALL related party transactions and subsequent material modifications
Key Compliance Point: Even non-material RPTs require audit committee approval under SEBI LODR Regulation 23.
Remuneration and sitting fees given by the listed entity or its subsidiary to its director, key managerial personnel, or senior management (excluding those in the promoter group) do not need audit committee approval if they are not material.
Audit Committee Powers Under Regulation 23:
- Review all related party transaction policies
- Grant omnibus approvals for repetitive transactions
- Ratify transactions up to ₹1 crore (new provision from December 2024) within 3 months or next audit committee meeting, whichever is earlier, provided it is not material
- Monitor quarterly RPT compliance
Tier 2: Omnibus Approval Mechanism for RPT Efficiency
Audit committees can grant omnibus approvals for repetitive related party transactions:
Omnibus Approval Conditions:
- Valid for maximum one year
- Must specify: names, transaction nature, amounts, pricing formula
- Quarterly review mandatory
- Emergency provision: Up to ₹1 crore for unforeseen RPTs
Tier 3: Shareholder Approval for Material Related Party Transactions and subsequent material modification
Material RPTs and subsequent material modifications require prior shareholder approval with critical restrictions:
- No related party voting permitted
- Applies to ALL related entities, not just transaction parties
- Prior approval mandatory (except for specific exemptions)
The audit committee of a listed entity shall define “material modifications” and disclose it as part of the policy on materiality of related party transactions.
SEBI LODR Regulation 23: Key Exemptions from RPT Approval
Related Party Transactions exempt from SEBI LODR Regulation 23 requirements:
- Inter-PSU transactions between public sector companies
- Parent-wholly owned subsidiary transactions (consolidated accounts)
- Inter-wholly owned subsidiary transactions of the same holding company
- Statutory payments to government entities
- Government-PSU transactions
Subsidiary Related Party Transactions Under SEBI LODR
SEBI LODR Regulation 23 addresses complex subsidiary RPT scenarios:
Unlisted Subsidiary RPT Requirements:
- Parent audit committee approval needed if transaction exceeds 10% of subsidiary’s standalone turnover
- Exception: Listed subsidiaries with own Regulation 23 compliance
New RPT Ratification Provisions (December 2024 Update)
SEBI introduced post-facto ratification for certain related party transactions:
Ratification Conditions:
- Maximum ₹1 crore per transaction
- Timeline: Within 3 months or next audit committee meeting
- Must provide rationale for missing prior approval
- Failure consequence: Transaction becomes voidable
Related Party Transaction Disclosure Requirements
SEBI LODR Regulation 23 mandates comprehensive RPT disclosures:
Disclosure Timeline:
- Every six months
- On the date of publishing financial results
- Published on company website
Disclosure Exemption:
- Director/KMP remuneration below materiality thresholds (except promoter group)
SEBI LODR Regulation 23: 2024-25 Key Updates
December 2024 Amendments:
- RPT ratification mechanism introduced
- Enhanced subsidiary transaction provisions
- Refined remuneration exemptions
March 2025 Changes:
- Special provisions for SME exchange listings
Related Party Transaction Compliance: Best Practices
For Company Secretaries:
- Maintain comprehensive related party registers
- Implement RPT identification systems
- Track the date for review RPT Policy
- Create SEBI LODR Regulation 23 compliance calendars
For CFOs:
- Integrate RPT considerations in budgeting
- Ensure market benchmarking for all related party transactions
- Develop management reporting for audit committees
- Ensure transactions covered as per accounting standards are also considered.
For Audit Committee Members:
- Demand business rationale for all RPTs
- Review omnibus approval utilization quarterly
- Ensure independent valuation for material transactions
Common SEBI LODR Regulation 23 Compliance Violations
Frequent RPT compliance mistakes:
- Transaction aggregation errors across financial years
- Missing subsidiary-level related party transactions
- Inadequate material modification approvals
- Related party voting on shareholder resolutions
- Late ratification beyond permitted timelines
RPT Red Flags for Corporate Governance
Warning signs of related party transaction abuse:
- Transactions significantly above market rates
- Circular fund flows between related entities
- Year-end timing of large RPTs
- Poor documentation of business rationale
- Frequent transaction amendments
Future of SEBI LODR Regulation 23: Compliance Trends
Expected developments in related party transaction regulation:
- Enhanced digital disclosure requirements
- Revised Industry Standard Note is expected to be issued
SEBI Adjudication Order on Family Care Hospitals Ltd: Violation of Related Party Transactions (RPT) Rules
Date of Order: June 3, 2025
Issued by: Securities and Exchange Board of India (SEBI)
Violation: Non-compliance with SEBI (LODR) Regulations – Related Party Transactions (Regulation 23)
What Was the Case?
SEBI passed an adjudication order against Family Care Hospitals Limited (FCHL) and its directors for violating rules related to Related Party Transactions (RPTs) under SEBI LODR Regulations.
Key violations included:
- Failure to disclose RPTs properly in the half-yearly filings (Regulation 23(9))
- Use of blanket approvals without naming related parties or specifying transaction values
- Non-disclosure of a debt assignment between the company and a related party
Penalties Imposed by SEBI
| Entity/Person | Penalty |
|---|---|
| FCHL | ₹9 lakh |
| Senior Management (jointly) | ₹13 lakh |
| Non-Executive Directors | ₹2 lakh each |
| Total Penalty | ₹34 lakh |
SEBI’s Key Observations
- Complete and specific RPT disclosures are mandatory.
- Blanket shareholder/board approvals are not acceptable unless they clearly name related parties and expected transaction values.
- The responsibility of compliance applies to subsidiaries as well, not just the listed parent.
Why This Matters
This SEBI order highlights the importance of:
- Timely and transparent disclosure of related party transactions
- Proper audit and board oversight
- Strict adherence to Regulation 23 of SEBI LODR Regulations
This serves as a strong reminder to all listed entities to ensure that RPTs are fully disclosed, well-documented, and regulatory compliant.
Click here to read SEBI Adjudication Order in the aforesaid matter.
Frequently Asked Questions: SEBI LODR Regulation 23
Q. Who can approve Related Party Transactions under SEBI LODR?
A. Only independent directors on the audit committee can approve RPTs. Material transactions also need shareholder approval.
Q. What is omnibus approval in Related Party Transactions?
A. Omnibus approval allows audit committees to pre-approve repetitive RPTs for up to one year, subject to specific conditions and quarterly reviews.
Q. What are the disclosure requirements for Related Party Transactions?
A. Companies must disclose RPTs every six months on the date of publishing financial results and on their websites.
Q. Does the presence of a price matter in identifying an RPT?
A. No. Whether or not a price is charged is irrelevant. Even a free service or a zero-value transaction can be an RPT if it involves or benefits a related party.
Q. If a director resigns today, can the company ratify yesterday’s transaction with him tomorrow?
A. This creates a regulatory paradox. Since the person was a related party when the transaction occurred, ratification rules still apply even post-resignation. However, if the resignation was to avoid RPT compliance, it could be deemed a violation.
Q. Can a company’s independent director approve an RPT with another company where he’s also an independent director?
A. Mind-Bender: This creates a conflict of interest within the audit committee itself. While technically both are independent directors, the substance over form principle suggests potential bias. Best practice: The director should recuse himself from one of the approvals, but SEBI hasn’t explicitly addressed this scenario.
SEBI LODR Regulation 23: Key Compliance Takeaways
SEBI LODR Regulation 23 represents India’s most comprehensive approach to related party transaction governance. For corporate professionals, mastering RPT compliance involves:
- Understanding materiality thresholds and their applications
- Implementing robust approval processes across all corporate levels
- Maintaining transparent disclosure practices
- Staying updated with regulatory amendments
- Building stakeholder confidence through good governance
Related Party Transaction compliance under SEBI LODR Regulation 23 isn’t just about regulatory adherence – it’s about building sustainable corporate governance practices that protect all stakeholders while enabling legitimate business operations.
For listed companies navigating RPT compliance in 2025, the key lies in viewing SEBI LODR Regulation 23 not as a constraint, but as a framework for transparent, ethical business practices that enhance investor confidence and corporate reputation.
Stox N Tax 
Leave a comment