[By Sharad Dhruw]
The author is a student of Hidayatullah National Law University, Naya Raipur
Introduction
In recent years, a significant evolution in the regulatory framework governing related party transactions (RPTs) under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 has taken place. This evolution reflects the SEBI’s transition from a regime that was primarily form-based to that of substance-driven and focused on economic scrutiny of disputed transactions, minority protection, and transparency. In order to achieve these objectives, the Securities Appellate Tribunal (SAT) has established a broad definition of materiality, aggregation, and value transfer in the context of related party transactions by its recent order. The Tribunal has recalibrated the compliance obligations applicable to listed businesses and strengthened SEBI’s broader governance mission by emphasizing economic substance above legal characterization.
Through this article, the author examines the SAT’s interpretation of the RPT framework. First, it outlines the key interpretative decisions, which includes related party aggregation, its view of strategic allocations as resource of transfers, its reliance on valuation for materiality and its greater emphasis on non-interested shareholder approval. Second, it examines the concerns these changes raise questions about regulatory proportionality, compliance assurance, and the limits of acceptable engagement in economic decision-making, even as they fortify protections against value diversion and conflicts of interest. Lastly, it puts forth a constructive way forward, informed by legal best practices.
Examining the Recent SAT Order
Firstly, for the purpose of determining materiality under Regulation 23(1) of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015, the transactions which are entered into a related party in a financial year must be aggregated, notwithstanding whether it arises from a single or multiple independent contracts. SAT in its order under Regulation 23 has been treated as a complete machinery provision, mandating aggregation at the level of the related party rather than at the level of individual contractual arrangements. This aggregation-centric interpretation finds resonance in the EU Shareholder Rights Directive II (SRD II), which also mandates comprehensive review of significant related-party transactions in order to identify covert value transfers and protect minority shareholders.
Secondly, the tribunal held that the geographical and product allocation of business between related parties with respect to a joint venture or shareholders’ agreement may constitute a “transfer of resources, service or obligations”, which qualifies as a related party transaction under Regulation 2(1)(zc) of the LODR, 2015. This allocation may involve the transfer of profit-making apparatus, including goodwill, customer relationships, and future revenue generating capacity, even in the absence of immediate assets transfer or monetary consideration. This portrays a substance-over-form approach, where impact on shareholder as well as economic consequences are prior over formal legal characterisation. In the regulatory domain, SEBI has consistently emphasised the requirement for an enhanced scrutiny of promoter-driven restructuring that affect minority shareholder, specifically by requiring that all material RPTs must disclose detailed pricing, valuation, and impact information to prevent value migration and ensure transparency. This aligns with IOSCO’s global guidance, which recognize that, transfers of commercial opportunities, intangible benefits, or future economic rights may constitute value transfers in related-party contexts even in the absence of formal asset conveyance, thereby warranting enhanced regulatory scrutiny.
Thirdly, the tribunal’s recognition of valuation a crucial mechanism for evaluating the materiality and fairness of complex related party arrangements, specially where transactions involve territorial allocation, business realignment, or transfer of future economic benefits supports the SEBI’s direction to appoint an independent valuer to measure business acquired and lost, while highlighting out that without valuation, it would be impossible to determine whether shareholder approval is necessary or whether materiality thresholds under Regulation 23(1) have been crossed. This clarifies the established corporate and securities law practice where valuation is frequently applied in mergers, demergers and reorganizing transactions to ensure informed shareholder decision making. From a regulatory point of view, SEBI has relied steadily on valuation-assessed assessments in related party transactions, preferential allotments, and scheme approvals, reflecting a wider trend against procedural compliance and towards economic substance and fairness examination. A comparable emphasis aligns in the ESMA’s opinion undue costs in UCITS and AIFs, stating the need to “identify, prevent, manage and monitor conflicts of interest to avoid detriment to investors,” highlighting similar objectives in material related-party scrutiny.
Lastly, the ruling reaffirms the importance of non-interest shareholder approval. This is a not a mere formality rather a substantive protection intended to protect minority interest in conflict-of interest situations involving related parties when a transaction or arrangement is determined to exceed materiality standards under Regulation 23. This aligns with the legal objective of the strengthened RPT regulation for listed businesses, which sets more stringent governance requirements rather than those found in the Companies Act, 2013 alone. In Needle Industries Ltd. v. Needle Industries Newey, the Court stressed the importance of treating minority shareholders with fairness and transparency. This is further reflected in SEBI’s ongoing tightening of RPT standards through amendments to the LODR, 2015 Regulations. Similarly, the OECD Principles of Corporate Governance recognises independent shareholder approval as a central mechanism for ensuring accountability and preventing abusive RPT’s.
Legal challenges consistent with the order.
While the enhanced RPT framework strengthens investor protection, listed companies involved in a variety of commercial arrangements suffer uncertainty due to its broad interpretation of materiality, value transfer, and valuation. These issues indicate that, in spite of its protective objectives, the regime might need to be examined more closely to deliver proportionate and practically feasible control.
First, Regulation 23(1) does not provide clarity by requiring all transactions with a related party to be aggregated within a fiscal year, but it also raises questions about how legally and commercially separate contractual arrangements are to be handled. By collapsing legally and commercially distinct contracts into a single aggregated assessment without regard to their underlying nature, purpose, or risk profile, the framework deprives listed entities of a predictable benchmark for determining ex ante whether a particular transaction is likely to trigger materiality thresholds, thereby generating compliance uncertainty. Since, materiality is evaluated cumulatively without taking into account the nature, purpose, or independence of individual contracts, this may create compliance uncertainty for listed entities involved in several, operationally unrelated transactions with the same related party. The shareholder approval procedure may turn into overly inclusive if there is not regulatory advice on how to distinguish between ordinary operational dealings and structurally significant arrangements.
Second, the substantive scope of what qualifies as a related party transaction is greatly expanded by characterizing geographic and product distribution under joint venture or shareholders’ agreements as a “transfer of resources, services, or obligations.” This perspective blurs the distinction between strategic business decision making and present value transfer, despite being based on a substance-over-form approach. Although in the absence of asset transfer or consideration, a wide range of internal restructurings and cooperative agreements may be vulnerable to RPT scrutiny if anticipated distribution of future business prospects is treated as a current transfer of profit-making apparatus. This raises inquiries regarding the boundaries of regulatory supervision and the degree to which securities legislation may encroach on areas that are customarily subject to commercial discretion at the board level.
Third, the regulator’s focus on economic substance is highlighted by the acknowledgement of valuation as an essential tool for evaluating materiality and fairness in complicated RPTs. However, there are also inherent difficulties in attributing valuation to future business acquired or lost. These valuation exercises rely on forward-looking assumptions regarding execution risks, competitive dynamics, and market conditions, all of which are inherently uncertain in nature. Different expert opinions and conflicting valuation results are possible in the absence of regulatory norms or a mandated valuation process under the LODR framework. When exercising their approval powers, shareholders may be forces to evaluate highly complex and uncertain financial estimates, which might complicate materiality determinations and raise compliance expenses.
Subsequently, minority protection in listed companies is strengthened by the RPT framework’s reinforcement of neutral shareholder approval. However, once materiality criteria are fulfilled, a uniform execution of shareholder approval requirements may also have an impact on the effectiveness of governance. In contrast with discrete asset transactions, requiring shareholder approval for complex arrangements including organizational realignment or future business allocation may impede managerial flexibility and slow decision-making. This approach may result in procedural burdens and approval fatigue in promote-driven organizations or businesses undergoing frequent internal reconfiguration, which could impair listed companies’ capacity to react quickly to changing market conditions while adhering to regulatory requirements.
Conclusion and Way Forward
A regulatory commitment to improving transparency and minority protection in listed companies can be observed in the SAT’s broad interpretation of the RPT framework. While the shareholder approval, substance-based evaluation, aggregation of transactions, and assessment of future economic consequences all strengthen protections against value diversion, their widespread implementation may create ambiguity for organizations involved in a variety of commercial arrangements. These interpretative extensions carry danger of causing administrative inefficiencies, compliance excess, and unintentional intervention into lawful managerial discretion in the absence of calibrated limitations.
A more reasonable regulatory strategy would ensure practical effectiveness while preserving the RPT regime’s protective architecture. First, it would reduce the ambiguity and avoid needless shareholder approvals if guidelines were issued regarding when multiple interactions with the same linked party should be consolidated under Regulation 23(1) and when they preserve unique contractual identity. The UK Financial Conduct Authority’s RPT framework requires aggregation for only transactions of a similar nature, thereby preventing over-inclusive materiality. Second, more precise discerption of what qualifies as a “transfer of resources, services, or obligations” would make it easier to differentiate between strategic corporate choices and actual value transfers, highlighting OECD Guidelines on Corporate Governance of State-Owned Enterprises, which require regulators to scrutinise only those related-party dealings that involve an identifiable economic transfer capable of affecting minority interests. Third, inconsistent and speculative valuation findings could be reduced by establishing suggestive valuation triggers or quantitative benchmarks for evaluating prospective business success or failure, this is consistent with the IFRS 13 (Fair Value Measurement), which mandate the use of market-based, forward-looking inputs and independently verifiable valuation techniques for transactions that materially affect economic value.. Lastly, a balanced and transaction-sensitive approach to shareholder approval may help avoid approval fatigue, aligning with the Singapore Code of Corporate Governance for independent shareholder approval only for material, non-ordinary course related-party transactions while permitting board-level oversight for routine or low-impact dealings, thereby preserving minority protection without constraining managerial flexibility. When combined, these improvements could achieve a balance between effective corporate governance with regulatory vigilance.