Background and Regulatory Rationale
SEBI’s November 2024 consultation paper highlighted concerns over increasing RPT volumes in the SME segment. In the Board meeting on December 18, 2025 [1]where this amendment was approved SEBI said that, while the SMEs have not entered into high value transactions exceeding Rs. 1000 crores ; nearly 50% of the top 50 SME issuers had entered into RPTs exceeding 10% of turnover. This raised red flags about transparency and minority shareholder protection.
Accordingly, SEBI proposed making Regulation 23 applicable to SMEs.
Introduction
The governance of related party transactions (RPTs) has always been a cornerstone of corporate transparency in Indian capital markets. Historically, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) mandated rigorous oversight of RPTs for main board listed companies through Regulation 23. However, SME listed entities were exempt.
This regulatory divide has now narrowed. Through a recent amendment notified on March 28, 2025, following SEBI’s board approval in December 2024, Regulation 23 has been extended to SME listed companies ushering in a new era of governance parity across market segments.
Understanding Regulation 23 of LODR and Its Core Requirements
Regulation 23 governs how listed entities manage their transactions with related parties. The key obligations under this provision include:
- Formulation of the RPT policy on materiality od the RPT transactions and review of such policy once every three years
- Audit Committee prior approval for all RPTs;
- Prior Shareholder approval for material RPTs, with the related party abstaining from voting;
Disclosures to stock exchanges (half-yearly under Regulation 23(9)) and in the Annual Report, specifically under the Corporate Governance Report and the Notes to the Financial Statements as per Ind AS 24, are required for all material related party transactions and other specified RPTs;
The Amendment and Applicability to SME Listed Entities
Key Amendment
A new clause, Regulation 15(2)(b)[2], now mandates compliance with Regulation 23 for all SME listed entities which satisfies one of the following thresholds (as on the last day of the preceding financial year):
- Listed entity having paid-up share capital more than rupees ten crore or;
- Listed entity having net-worth exceeding rupees twenty-five crore
For instance, consider an SME-listed company, MNO Ltd., whose financials as of March 31, 2025, show a paid-up share capital of ₹12 crore and a net worth of ₹22 crore. Even though its net worth is below the ₹25 crore mark, the company crosses the threshold on account of its paid-up capital exceeding ₹10 crore. Therefore, beginning FY 2025–26, Regulation 23 will become applicable to MNO Ltd., and it must ensure compliance with the prescribed framework for identifying, approving, and disclosing related party transactions.
- Materiality threshold for SMEs:
As per the amended Regulation 23 (1) of the LODR Regulations a transaction to be considered as material transaction with the related party if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds Rupees fifty crore or ten per cent. of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity, whichever is lower.
- Effective Date
The changes took effect from April 1, 2025, and apply both to existing and newly listed SME entities. For companies newly breaching the thresholds, compliance must begin within six months from the date of triggering (as per proviso to the Regulation 15(2)(b) of LODR Regulations3).
So if a company to whom RPT becomes applicable on March 31, 2025 will get six months to comply with the RPT norms. Also Once these regulations of RPT becomes applicable to a company will remain applicable till the time the equity share capital and the net-worth of the listed entity reduces and remain below the specified threshold for a period of three consecutive financial years.
Ongoing and Post-Listing Compliances
For Existing SME Listed Companies
Entities already listed before April 1, 2025, and meeting the applicability thresholds must:
- Review existing RPTs and assess materiality under the new thresholds.
- Update Audit Committee composition, if needed, and assign RPT oversight.
- Adopt and disclose a formal RPT Policy, approved by the Board.
- Implement tracking systems to monitor cumulative RPT values.
- Prepare for shareholder approvals under Regulation 23(2), with related parties abstaining from voting.
- In cases where an SME-listed entity has not obtained omnibus approval for Related Party Transactions (RPTs) under Section 177(4)(iv) of the Companies Act, 2013, it must ensure such approval is obtained in accordance with Regulation 23(3) of the SEBI (LODR) Regulations, provided the entity meets the thresholds specified under Regulation 15(2)(b). This ensures that audit committee approval, whether specific or omnibus, is in place as per the applicable regulatory framework.
Once a SME falls within the purview of Regulation 23, it must not only ensure that its own material RPTs are approved by shareholders prior to start date of RPTs, but also assess the compliance obligations of its listed subsidiaries, especially in cases where RPTs by subsidiaries are crossing materiality threshold as per regulation 23 of LODR.
So, SME listed entities will not only have to ensure regulation 23 compliance for RPTs entered by them but also for material RPTs entered by their subsidiaries where SME listed entity is not a party.
- Even if a related party transaction is in the ordinary course of business and at arm’s length, and thus exempt from the approval requirements under Section 188 of the Companies Act, 2013, it may still require prior approval of the shareholders under Regulation 23(4) of the SEBI (LODR) Regulations, 2015, if it crosses the prescribed materiality threshold. Such approval must be obtained before September 30, 2025, in line with the effective date for compliance. Related parties would not be able to vote on this resolution irrespective of whether they are party to the transaction are not.
For Companies Planning to List
Entities intending to list post-April 1, 2025, must factor this regulation into IPO planning. Key steps include:
- Pre-IPO governance structuring, including formation of an Audit Committee;
- Drafting and adopting an RPT policy before listing;
- Arm’s length benchmarking of intra-group transactions;
- Disclosure of RPT framework in the offer document, where relevant.
Post-listing, such entities will be immediately subject to Regulation 23 if their financials breach either threshold that means they have to obtain audit committee approval before they enter any transaction with the related party.
Interpretive Guidance and Industry Standards
Further, SEBI is set to rolled out Industry Standards for RPTs applicable from September 1, 2025, offering standardized formats for disclosures expected to enhance uniformity, transparency and compliance efficiency.
Now as the Regulation 23 is applicable to SMEs these Industry Standards are also applicable to the SMEs now.
Conclusion
The extension of Regulation 23 to SME listed entities represents a significant regulatory development aimed at strengthening transparency in related party dealings. By calibrating the thresholds and materiality criteria to suit the SME context, SEBI has sought to ensure that corporate governance expectations evolve in line with market realities. For SME companies, this change necessitates a shift toward more structured internal processes, board-level oversight, and stakeholder disclosures. Those that treat these requirements as an integral part of institutional discipline rather than a compliance burden are likely to position themselves more favourably with investors, improve risk management, and support sustainable market participation. Early preparation and clear documentation will be key to navigating this new framework effectively
[1] Rationale From Board Note of Dec 18, 2025: 4.2.1 (b)(iii) :
As observed from the disclosures by top 50 SME listed entities by market capitalization on NSE and BSE in their annual report for FY 2022-23, while the SMEs have not entered into high value transactions exceeding Rs. 1000 crores, 1 out of 2 SME listed entities have undertaken RPTs of more than 10% of their annual consolidated turnover. The transactions entered by entities should be commensurate to their turnover. In case the transaction is exceeding 10% of the turnover, the same should be subjected to higher scrutiny in the form of approval by shareholders. Hence, the suggestion received may not be accepted.
[2] 3 Regulation 15(2)(b) of LODR Regulations:
listed entity which has listed its specified securities on the SME Exchange:
Provided that with effect from April 01, 2025, the provisions of regulation 23 shall be applicable in respect of a listed entity which has listed its specified securities on the SME Exchange and which has either paid up equity share capital exceeding Rupees ten crore or net worth exceeding Rupees twenty-five crore, as on the last day of the previous financial year:
Provided further that where the provisions of regulation 23 become applicable at a later date to a listed entity which has listed its specified securities on the SME Exchange, it shall ensure compliance with the same within six months from such date:
Provided further that once the provisions of regulation 23 become applicable to a listed entity which has listed its specified securities on the SME Exchange, they shall continue to remain applicable till such time the equity share capital and the net-worth of such entity reduces and remains below the specified threshold for a period of three consecutive financial years.
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