[By Aditya Pandey]
The author is a student of National Law University Odisha.
Introduction
Related-party transactions (RPTs) – deals between a company and persons or entities in its orbit (promoters, relatives, subsidiaries, etc.) – pose inherent conflict-of-interest risks. Under India’s Securities and Exchange Board of India (SEBI) rules and the Companies Act, these must be scrutinized and disclosed to protect minority shareholders. In recent years SEBI has dramatically broadened the RPT regime. The 2015 LODR Regulations (as amended) now sweep in not only a listed company’s dealings with its own related parties, but also inter-group arrangements and even certain third-party transactions that “benefit” insiders. For example, SEBI’s January 2021 amendments defined RPTs to include transactions between either a listed company or any of its subsidiaries and any related party of any group entity. In practice, this means a listed parent must track and approve a wide variety of inter-corporate deals at both Indian and foreign subsidiaries.
SEBI’s rationale – echoed by experts – is that effective RPT oversight requires a group-wide lens. The obligations have cascading effects: the listed parent must identify its own related parties and inform its subsidiaries, while subsidiaries (even unlisted ones) must identify their related parties and report any material RPTs up the chain. As one law firm analysis explains, “to carry out the implementation of the RPT framework at the holding company level, the subsidiaries are also required to identify their related parties” and track their own RPTs against the approval thresholds of the listed parent. This group-wide definition promotes consistency but also creates ambiguity, especially for unlisted or foreign subsidiaries that are not directly governed by LODR. SEBI itself acknowledged this gap: in October 2024 it informally advised that unlisted subsidiaries must nonetheless use the LODR definition to identify related parties and RPTs. This “entity-agnostic” approach promotes uniformity; however, it gives rise to complex questions (discussed below) regarding the applicable legal framework in specific contexts.
Key Regulatory Developments
SEBI has continuously tightened RPT rules, particularly since 2021. Key changes include:
- Expanded scope (2021–22). Effective April 2022, SEBI’s amendments swept in cross-entity transactions. RPTs now cover, for example, deals between a listed company and the related parties of its subsidiaries, or between a subsidiary and related parties of the parent or another subsidiary. In other words, all group-related transactions are “RPTs” subject to audit committee and shareholder approvals under LODR. Similarly, any individual holding equity in the company on a beneficial basis was classified as a related party: initially, this applied to those with 20% ownership (from April 2022), and later, the threshold was reduced to 10% (from April 2023). These changes mirror global practices (for example, LODR borrowed the UK rule that a third-party deal is an RPT if its “purpose and effect” benefits an insider).
- Subsidiaries and thresholds. SEBI added detailed rules for subsidiaries’ RPTs. If a subsidiary (including foreign ones) transacts with any related party beyond certain thresholds, the listed parent’s audit committee must approve it. Specifically, any deal by a subsidiary (with its own related party) exceeding 10% of the listed parent’s consolidated turnover (or 10% of the subsidiary’s standalone turnover from Apr 2023) must get the parent audit committee’s nod. This effectively gives the Indian-listed parent oversight – even veto power – over large transactions by its overseas subsidiaries. Analysts note this raises potential conflicts (a parent’s directors approving deals in foreign subsidiaries) but also ensures uniform governance across the group.
- Approval processes and disclosures. SEBI has beefed up information and approval requirements. Audit committees must review long-term or “material” modifications to RPTs and obtain detailed information (business rationale, financial terms, valuations, etc.) before approval. Investor-level scrutiny also increased: in 2022, SEBI made it easier to trigger the requirement for shareholder approval by lowering the applicable threshold. Now any RPT exceeding ₹1,000 crore or 10% of consolidated turnover (whichever is lower) must go to shareholders – dramatically expanding the number of RPTs on which the public votes. (Previously the threshold was simply 10%.) Shareholders must receive detailed explanatory statements, including external valuation reports, to justify why even arms-length RPTs are in the company’s interest.
- Recent streamlining (2024). Late in 2024, SEBI responded to industry feedback for ease-of-doing-business. The December 2024 LODR amendments introduced some relief: routine transactions like uniform retail purchases by promoters or employees can be excluded from “related party” treatment if made on arm’s-length terms. Companies may now ratify small RPTs (under ₹1 crore annually) after the fact, whereas before every RPT required pre-approval. Remuneration to directors/KMPs below materiality need not go to the audit committee each time. Importantly, SEBI formally extended its omnibus approval mechanism to cover RPTs by subsidiaries. And new compliance was eased by integrating RPT disclosures into a single “integrated filings” framework.
Overall, these amendments aim to balance transparency and efficiency. They underscore that RPT regulation is still evolving – most recently SEBI has issued model “Industry Standards” for the information to be given to committees/shareholders (effective late 2025) to further standardize disclosures.
In practice, vigilant boards and audit committees must scrutinize RPTs. Audit members should demand justification and valuation reports for any significant deal, ensuring shareholders understand the rationale. As analysts have noted, post-amendment companies face a “sea-change in the regulatory framework for RPTs,” meaning they must step up internal processes – from identifying related parties to pre-approving and reporting transactions. In particular, audit committees now bear extra duty: beyond routine approvals they must actively review subsidiaries’ transactions (even foreign ones) and their material modifications.
Compliance Challenges
Despite these rules, practical challenges abound. A key issue is identification of related parties across the group. Under LODR Reg.2(1)(zb), a “related party” of a listed company includes anyone in its promoter/promoter-group, persons holding ≥10% (beneficial) shares, and others (including as per accounting standards). But what about unlisted or foreign subsidiaries? SEBI’s recent informal guidance says yes – even unlisted subsidiaries must follow the same LODR definition to identify their related parties for RPT compliance. This group-wide approach ensures consistency but can over-extend the law. For example, many LODR criteria (like “promoter group”) make sense only for listed entities, not unlisted affiliates. If an unlisted subsidiary were to apply LODR definitions literally, it might have to board-approve transactions that are not RPTs under its own (Companies Act) laws. One analysis notes that forcing unlisted companies to comply “with the LODR Regulations, which are otherwise not applicable” creates legal uncertainty.
Overseas subsidiaries face an even tougher bind. Applying Indian RPT definitions abroad raises questions of extraterritorial reach. In an HCL Tech guidance case, SEBI acknowledged that foreign firms are bound primarily by their own country’s laws – for example, HCL’s foreign unit could file unaudited financials if home law permits. More generally, definitions (e.g. of “relative” or “associate”) differ across jurisdictions. Experts warn that mandating an “entity-agnostic” LODR definition globally could produce inaccuracies or impossible burdens on foreign subsidiaries. In short, group companies must navigate dual obligations: meet LODR’s spirit without contravening their local law.
Another perennial challenge is quantitative thresholds and interpretation. SEBI now requires audit-committee sign-off on subsidiary RPTs above the 10% turnover tests. But how to aggregate transactions? SEBI’s July 2024 Linde order clarified that all transactions with a given related party must be aggregated for materiality, even if under different contracts. Such strict interpretation can catch businesses by surprise. Similarly, the “benefit of related party” provision (effective Apr 2023) – borrowed from UK rules – applies if the substance of a third-party deal advantages an insider. SEBI has given no detailed guidance on how to judge “purpose and effect,” making it a high-risk, subjective standard.
Finally, enforcement actions in 2024 sent a strong signal. In the RHFL (Reliance Home Finance) case (Aug 2024), SEBI characterized large loans to ostensibly unrelated firms as part of an “elaborate scheme orchestrated by the promoters” to divert funds to affiliates. SEBI concluded that even entities “potentially indirectly linked” — due to cross-shareholding and shared directors — should be treated as related parties. It further held that the loans were misleadingly undisclosed. Similarly, SEBI’s Linde India order (July 2024) adopted a broader view of the 10% threshold, insisting on group-wide aggregation. These rulings imply that SEBI will probe the substance of transactions and liberalize the scope of “related”, even at the cost of imposing tougher obligations on companies and their directors.
Comparative Perspectives
Globally, oversight of Related Party Transactions (RPTs) also prioritizes substance over form. For instance, IAS 24 (also adopted in India as Ind AS 24) mandates the disclosure of transactions with entities that are under common control or significant influence. This accounting standard defines a related party broadly and requires companies to report not just direct relationships, but also indirect connections that could influence financial decisions—such as transactions involving subsidiaries, associates, joint ventures, key management personnel, or entities controlled by them. The objective is to ensure transparency and prevent conflicts of interest by making such relationships visible to investors and regulators. SEBI’s recent changes echo such international trends. But some comparators offer lessons: in the U.S., the SEC mandates disclosure of related-party deals in proxy statements and MD&A, but does not impose mandatory pre-approval of all such deals – relying more on robust auditor and board oversight. Striking the right balance between rigorous oversight and business flexibility remains a challenge worldwide.
Policy Recommendations
To reconcile clarity with proportionality, we offer the following suggestions:
- Clarify Subsidiary Obligations. SEBI should explicitly state how RPT rules apply to unlisted and foreign subsidiaries. For instance, a circular or amendment could allow a subsidiary to rely on its local law’s definition of “related party,” while still ensuring the parent aggregates any resulting RPTs for LODR compliance. This would prevent overreach and reduce legal uncertainty, without undermining group-wide transparency.
- Refine Materiality. Consider recalibrating thresholds or providing safe harbours for de minimis RPTs (especially routine intra-group services) to cut unnecessary compliance burden. For example, exempting low-value or time-bound transactions (like short-term loans below a modest amount) from strict prior approval might ease pressure on audit committees without harming investors.
- Guidance on “Benefit”. SEBI should issue detailed guidance or illustrative examples on applying the “purpose and effect” test (e.g. sectors or structures that typically implicate this rule) to help companies self-assess. Clear criteria would reduce subjective enforcement risk and align understanding between issuers and the regulator.
- Strengthen Internal Controls. Listed companies and groups must proactively build robust RPT policies. They should maintain centralized RPT registers, use technology (ERP systems, compliance software) to flag RPTs, and train management on identifying indirect relationships. Audit committees should insist on independent valuations for large Related Party Transactions (RPTs) and require written certifications from the CEO and CFO confirming that the transactions were conducted on an arm’s length basis. These practices align with the safeguards proposed under recent SEBI reforms.
- Engage Stakeholders. Regulators and market bodies could continue collaborating (as done via the Industry Standards Forum) to fine-tune the rules. For example, SEBI might jointly develop templates for RPT disclosure to standardize what audit committees see. Corporate leaders and investors should also dialogue on proportionality, ensuring RPT rules do not unduly block legitimate business within family-run groups.
By pursuing clarity and consistency, regulators can maintain trust without imposing unreasonable costs. Companies, in turn, should view RPT compliance not as a nuisance but as fundamental to good governance.
Conclusion
Related-party dealings will always demand careful scrutiny in an economy where promoter ownership is common. SEBI’s expanding LODR framework – though complex – reflects this imperative. Recent years have seen a tighter, more principle-based regime: broadened definitions, lower thresholds, and stiffer enforcement. Going forward, it is crucial that SEBI and lawmakers refine these rules to make them clear, balanced, and implementable. For example, harmonizing LODR with the Companies Act and foreign laws on basic definitions would reduce confusion, while calibrated exemptions would ensure proportionality.
Corporate leaders and compliance officers must stay vigilant. In practice, every RPT must be reviewed for fairness, fully documented, and transparently reported. The regulator’s message is clear: if an RPT is material or even possibly benefiting insiders, expect full disclosure and scrutiny. Companies that embrace rigorous RPT governance — treating compliance as an ongoing board-level priority — will not only meet their legal duties but also signal commitment to fairness to investors and the market. In the dynamic landscape of 2023–24, the goal should be a compliance regime that is both strict enough to protect shareholders and flexible enough to accommodate legitimate business needs across the group.