When ease of doing business aids tunnelling

When promoters are unchallenged and minority investors lack strength, materiality thresholds become the only reliable brake on tunnelling

- PRASENJIT CHAKRABARTI BRIJESH K MISHRA

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 transactionan 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 ₹1,000 crore or 10% of the turnover as material. This uniform threshold of ₹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 ₹20,000 crore; ₹2,000 crore plus 5% of the turnover above that level up to ₹40,000 crore; and for the largest firms, ₹3,000 crore plus 2.5% above ₹40,000 crore, capped at ₹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.