Related-Party Transactions and Corporate Fraud: Evaluating SEBI LODR 2026 Reforms

Summary: Related-party transactions (RPTs) are an integral part of corporate operations but may also facilitate corporate fraud, conflicts of interest and diversion of funds to promoter-connected entities, thereby threatening minority shareholders’ interests. The Companies Act, 2013, particularly Sections 177 and 188, and Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, establish safeguards through audit committee scrutiny, shareholder approvals, materiality thresholds and disclosure obligations. However, corporate governance controversies involving Satyam Computer Services, Dewan Housing Finance Corporation Limited (DHFL), Fortis Healthcare, Leel Electricals and Gensol Engineering demonstrate the limitations of regulatory mechanisms when related-party relationships are concealed, financial transactions are inadequately disclosed or internal approval procedures are bypassed. While SEBI’s reforms concerning materiality thresholds and disclosure requirements seek to balance regulatory compliance with investor protection, they cannot independently prevent fraudulent transactions or ensure commercial fairness. Effective minority shareholder protection requires independent audit committees, accurate identification of related parties, transparent financial reporting, robust internal controls, scrutiny of ultimate beneficiaries and timely regulatory enforcement. The central challenge is not merely determining which transactions require approval but ensuring that suspicious transactions are detected, investigated and appropriately addressed. Consequently, strengthening corporate governance practices and enforcement mechanisms is essential to ensuring that SEBI’s related-party transaction framework provides substantive rather than merely procedural protection to minority shareholders.

Related-Party Transactions and Corporate Fraud: Do SEBI’s LODR Reforms Protect Minority Shareholders?

Introduction

Related-party transactions (RPTs) are a common feature of modern corporate business. Listed companies frequently enter into transactions with entities connected to their promoters, directors, subsidiaries or other related persons. Such transactions may include the purchase of goods, the provision of services, loans, asset transfers and other commercial arrangements.

Related-party transactions are not inherently unlawful. When conducted on fair terms and with appropriate oversight, they can improve operational efficiency and strengthen business relationships. However, when controlling shareholders use their influence to divert corporate resources for personal benefit, these transactions may become instruments of corporate fraud.

The principal concern is the protection of minority shareholders. While promoters and controlling shareholders may exercise significant influence over corporate decisions, minority shareholders often lack the power to prevent transactions that adversely affect their interests.

The Securities and Exchange Board of India (SEBI) has introduced regulatory measures to improve transparency and accountability in listed companies. Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, establishes requirements concerning related-party transactions, including approval and disclosure obligations.

However, an important question remains: Can changes to materiality thresholds and disclosure requirements effectively prevent corporate fraud, or do they primarily regulate transactions that companies already disclose?

This article examines the legal framework governing related-party transactions, analyses selected corporate enforcement matters and evaluates whether regulatory reforms adequately protect minority shareholders.

Understanding Related-Party Transactions as a Form of Corporate Fraud

White-collar crime generally refers to unlawful conduct committed in occupational or professional settings, particularly by persons who occupy positions of trust or authority. Edwin H. Sutherland’s work on white-collar crime highlights the importance of examining misconduct committed by individuals operating within legitimate business and professional environments.

In corporate settings, promoters and directors exercise considerable control over company resources and decision-making. Their position carries responsibilities towards the company and its shareholders. When that authority is misused to obtain personal benefits at the expense of the company, it raises serious concerns regarding corporate governance and fiduciary accountability.

One relevant economic concept is tunnelling, which describes the transfer of resources or economic benefits from a company to its controlling shareholders or associated entities. Such conduct may involve loans on favourable terms, transactions at unfair prices, inflated purchases or the transfer of assets to connected entities.Related-party transactions can provide a mechanism for such conduct when conflicts of interest are not properly identified and controlled.

Nevertheless, not every transaction involving a related party constitutes fraud. The essential issue is whether the transaction serves a legitimate commercial purpose, is conducted on appropriate terms and complies with applicable legal and regulatory requirements.

Consequently, the objective of corporate regulation should not be to prohibit all related-party dealings. Instead, the regulatory framework must distinguish legitimate business transactions from arrangements that improperly benefit controlling shareholders.

Legal Framework Governing Related-Party Transactions in India

1. Companies Act, 2013

The Companies Act, 2013, establishes important safeguards against conflicts of interest in corporate transactions. Section 188 regulates specified contracts and arrangements involving related parties. Depending on the nature and value of a transaction, the provision may require approval from the board of directors and, where applicable, shareholders through an ordinary resolution, subject to the statutory conditions and exemptions.

Section 177 addresses the role of the audit committee. For companies to which the relevant requirements apply, the audit committee provides an additional layer of scrutiny over financial reporting, internal controls and related-party transactions.

These provisions seek to ensure that transactions involving connected persons are subjected to appropriate oversight rather than being determined exclusively by individuals who may personally benefit from them.

2. SEBI (LODR) Regulations, 2015

Listed companies are also subject to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Regulation 23 provides a framework for the identification, approval and disclosure of related-party transactions. Its requirements are intended to improve transparency and ensure that material transactions receive appropriate scrutiny.

The audit committee plays a particularly important role because it can examine the commercial rationale, financial implications and potential conflicts associated with a proposed transaction.

Shareholder approval requirements provide an additional safeguard for material transactions, subject to the applicable regulatory provisions and exemptions. Related parties are generally restricted from voting on resolutions concerning related-party transactions where the relevant rules require their abstention.

The effectiveness of these safeguards, however, depends on accurate identification of related parties, meaningful disclosure and the willingness of the relevant authorities to enforce compliance.

3. Regulatory Reforms and Materiality Thresholds

Changes to materiality thresholds seek to balance investor protection with the practical requirements of corporate operations.

A threshold-based approach can reduce unnecessary procedural burdens associated with routine transactions. However, the relationship between transaction size and the risk of misconduct is not always straightforward.

A transaction below a prescribed threshold may still involve a conflict of interest or an improper transfer of value. Conversely, a substantial transaction may be commercially legitimate if it is conducted transparently and on fair terms.

Therefore, materiality thresholds should not be treated as a complete measure of fraud risk.

The precise requirements applicable to a transaction must be determined from the relevant notified regulations, amendments and SEBI circulars in force on the date of the transaction. The specific amendments and thresholds discussed in the underlying research paper require verification against the official regulatory text before publication.

Corporate Enforcement Matters: Lessons for Minority Shareholder Protection

Selected corporate enforcement matters illustrate the different ways in which related-party transactions and alleged fund diversions can affect corporate governance.

1. Satyam Computer Services and the Maytas Transaction

The Satyam scandal remains one of India’s most prominent examples of corporate accounting fraud.

In December 2008, Satyam’s board approved a proposal to acquire Maytas Infra and Maytas Properties, companies associated with the family of Satyam’s chairman, B. Ramalinga Raju. The proposed transaction was valued at approximately US$1.6 billion and attracted substantial opposition from investors.

Following the backlash, the proposal was withdrawn. In January 2009, Ramalinga Raju admitted to manipulating Satyam’s accounts, revealing a serious breakdown in corporate governance.

The proposed Maytas acquisition raised concerns about conflicts of interest, the commercial rationale of the transaction and the interests of public shareholders.

Relevance to related-party regulation: The episode demonstrates why transactions involving promoter-connected entities require independent scrutiny. Proper examination by directors and audit committees, adequate disclosure and effective shareholder oversight can help identify transactions that may not serve the interests of the company.

However, the Satyam episode predates the Companies Act, 2013, and the LODR framework in its present form. It should therefore be treated as a historical illustration of corporate governance failures rather than direct evidence of the effectiveness of later regulatory amendments.

2. Dewan Housing Finance Corporation Limited (DHFL)

The DHFL matter highlights the difficulties associated with identifying related parties and tracing the movement of corporate funds.

SEBI proceedings concerning DHFL examined allegations involving substantial amounts channelled to entities associated with the company’s promoters through transactions recorded as loans.

The research paper describes findings concerning entities commonly referred to as the “Bandra Book Entities” and reports that the transactions were not appropriately identified as related-party transactions.

The case illustrates an important weakness in any approval-based regulatory system: its effectiveness depends on whether the relevant parties and transactions are identified correctly in the first place.

If a transaction is incorrectly classified or concealed, the safeguards associated with related-party approval and disclosure may not operate as intended.

Relevance to minority shareholders: Strengthening materiality thresholds alone cannot resolve failures in identifying related parties. Companies need reliable records of group entities, effective internal controls and procedures to examine the ultimate beneficiaries of significant financial transactions.

The specific findings, amounts and penalties should be verified against the relevant SEBI final order before publication.

3. Fortis Healthcare and Alleged Diversion of Funds

The Fortis Healthcare matter raised concerns about the movement of company funds through entities associated with its promoters.

Regulatory proceedings examined allegations concerning the transfer of funds through multiple corporate entities and the recovery of amounts allegedly diverted.

Transactions routed through several entities can make it difficult to identify the ultimate beneficiary and determine whether the transactions were properly disclosed and approved.

This problem is not necessarily solved by lowering or raising the materiality threshold. If the underlying transactions are concealed or their relationships are not identified, ordinary approval mechanisms may fail to detect them.

Relevance to corporate governance: Listed companies require effective group-level monitoring, appropriate verification of counterparties and internal controls capable of identifying unusual patterns of fund transfers.

Regulatory action must also be supported by fair procedures, reliable evidence and compliance with applicable legal requirements.

The allegations and findings in the relevant proceedings must be distinguished carefully when discussing this matter.

4. Leel Electricals Limited

The Leel Electricals matter provides another example of concerns surrounding corporate funds and internal governance procedures.

According to the research paper, SEBI proceedings recorded concerns about funds transferred to related parties without the required audit committee or board approvals.

The paper also refers to the absence of audit committee meetings in the relevant circumstances.

If transactions are undertaken without following the prescribed approval process, changes to materiality thresholds may have limited preventive value. A threshold-based framework cannot provide effective protection when the underlying procedures are bypassed.

Relevance to minority shareholders: Companies must ensure that approval requirements are followed in practice. Audit committees should perform substantive reviews rather than merely satisfy procedural requirements.

The relevant SEBI order should be consulted to confirm the precise findings, dates and legal consequences before publication.

5. Gensol Engineering Limited

The Gensol Engineering matter illustrates the importance of internal financial controls and the scrutiny of transactions involving connected entities.

In 2025, SEBI issued interim proceedings concerning alleged irregularities involving company funds and promoter-related interests. The research paper discusses allegations concerning electric vehicles purchased by the company and leased to a related entity, BluSmart.

These allegations raised questions about the use of corporate resources, internal controls and the protection of investors.

An important distinction must be maintained between allegations recorded in interim proceedings and findings finally established after adjudication.

Relevance to regulatory reform: Effective governance requires more than formal disclosure. Companies must maintain reliable financial records, investigate unusual transactions and ensure that the commercial rationale for dealings with connected entities is properly documented.

This matter reinforces the need to strengthen internal controls and enforcement rather than relying exclusively on materiality thresholds.

Critical Analysis: Are SEBI’s Reforms Sufficient?

The cases discussed above reveal that related-party risks arise in different circumstances. Some involve transactions that are disclosed but raise concerns about conflicts of interest. Others concern alleged diversions in which the identification of related parties, the approval process or the movement of funds becomes the central issue.

This distinction is important when assessing the effectiveness of regulatory reform.

1. Disclosure Does Not Always Ensure Fairness

A transaction may be disclosed and formally approved without necessarily being fair to the company.

Effective scrutiny requires an examination of the transaction’s commercial purpose, pricing, financial consequences and potential conflicts of interest.

Audit committees must therefore go beyond procedural compliance and evaluate whether a proposed transaction is genuinely beneficial to the company.

2. Undisclosed Transactions Present a Greater Challenge

Approval requirements cannot operate effectively when transactions are concealed or the parties involved are not correctly identified.

The DHFL matter, as discussed in the research paper, illustrates the importance of accurate related-party identification.

A regulatory framework that relies heavily on company disclosures must be supported by effective verification mechanisms and meaningful enforcement.

3. Materiality Thresholds Require Careful Design

Thresholds can make compliance more proportionate by reducing unnecessary procedural burdens associated with ordinary business transactions.

However, excessively permissive thresholds may reduce scrutiny of significant transactions, particularly where minority shareholders have limited influence over corporate decisions.

The appropriate balance requires an assessment of transaction size, corporate structure, potential conflicts and the effectiveness of other safeguards.

4. Enforcement Is as Important as Prevention

Corporate misconduct may remain undetected for substantial periods, especially where transactions involve multiple entities.

Even a well-designed approval framework cannot guarantee protection if violations are not detected and addressed effectively.

Timely investigation, reliable financial reporting, appropriate recovery measures and fair adjudicatory procedures are therefore essential components of minority shareholder protection.

The central issue is not simply whether a transaction crosses a prescribed threshold. It is whether the regulatory system can identify improper conduct, establish the relevant facts and impose appropriate consequences.

Recommendations for Strengthening Minority Shareholder Protection

The following measures could improve the effectiveness of India’s related-party transaction framework.

1. Maintain an Accurate Register of Related Parties

Listed companies should maintain reliable, regularly updated records of related parties, subsidiaries and other relevant group entities. Appropriate verification procedures should be used to identify connections that may not be apparent from the immediate corporate structure.

2. Strengthen Audit Committee Oversight

Audit committees should examine the commercial rationale, pricing, financial implications and potential conflicts associated with significant related-party transactions.

Their role should involve substantive scrutiny rather than merely recording formal approval.

3. Improve Internal Financial Controls

Companies should establish procedures for identifying unusual transfers, monitoring intercorporate loans and examining transactions involving promoter-connected entities.

Internal controls should also facilitate the identification of transactions that may have been incorrectly classified or inadequately disclosed.

4. Improve Regulatory Detection and Enforcement

SEBI and other competent authorities should continue to strengthen their capacity to examine complex corporate structures, trace suspicious fund movements and respond promptly to substantiated violations.

Any recovery or enforcement action must remain consistent with statutory powers and applicable procedural safeguards.

5. Enhance Transparency for Investors

Clear and accessible disclosures can help shareholders understand the nature, value and commercial purpose of related-party transactions.

Making relevant information easier to analyse may also help investors, researchers and other stakeholders identify recurring patterns that warrant further scrutiny.

6. Evaluate the Practical Impact of Regulatory Amendments

The effectiveness of materiality thresholds and disclosure requirements should be assessed periodically.

An empirical study comparing related-party transactions, approval patterns, regulatory violations and enforcement outcomes before and after the relevant amendments could provide stronger evidence of whether the reforms are achieving their intended objectives.

Conclusion

Related-party transactions are an essential part of modern corporate activity, but they can also create opportunities for conflicts of interest and the improper transfer of corporate resources. India’s legal framework, particularly the Companies Act, 2013, and Regulation 23 of the SEBI LODR Regulations, provides important safeguards through approval requirements, disclosure obligations and shareholder oversight.

Nevertheless, the effectiveness of these safeguards depends on more than the design of materiality thresholds. The corporate matters discussed in this article illustrate different challenges, including conflicts of interest in proposed acquisitions, difficulties in identifying related parties, alleged fund diversions and failures of internal controls.

Regulatory reforms can improve the scrutiny of transactions that are properly identified and disclosed. They are less effective when transactions are concealed, related-party relationships are overlooked or approval procedures are bypassed.

Ultimately, minority shareholder protection requires a combination of transparent disclosure, independent oversight, accurate corporate records, effective internal controls and timely enforcement.

The central lesson is that materiality thresholds determine when particular approval requirements apply, but effective detection and enforcement determine whether the regulatory framework can respond to corporate misconduct.