In today’s corporate environment, Related Party Transactions (RPTs) have become a focal point of regulatory scrutiny and corporate governance. These transactions, though often necessary and legitimate, carry a heightened risk of conflict of interest, mismanagement, or undue influence if not handled transparently. Recognizing this, Indian law has laid down a detailed framework through the Companies Act, 2013, IND-AS 24, and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, to ensure such transactions are disclosed, approved, and monitored appropriately. This article delves into the legal intricacies governing RPTs, aiming to decode their definition, compliance requirements, and the practical challenges they pose—extending the discussion well beyond the confines of the boardroom.
Understanding the Term: Who is a Related Party?
The concept of a “related party” lies at the heart of regulatory frameworks governing Related Party Transactions (RPTs). While the term may appear straightforward, its definition varies slightly depending on the legal or accounting lens through which it is viewed. Indian corporate law and financial reporting standards identify a range of individuals and entities as related parties, primarily based on the existence of control, influence, or close personal and business relationships.
Related Party (RP) is defined under three key provisions:
- The Companies Act, 2013
- Indian Accounting Standard (IND-AS) 24
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
Together, these provisions ensure that any relationship capable of influencing business decisions is brought under the scrutiny of governance and disclosure norms.
| Regulation | Who is Related Party |
| Companies Act, 2013 | 1. Director or his relative
2. Key Managerial Personnel (KMP) or his relative 3. A firm in which a director, manager, or relative is a partner 4. A private company in which a director or manager or their relative is a member/director 5. A public company where a director/manager is also a director and with relatives holds >20% of paid-up capital 6. A body corporate or person whose directions influence the board 7. Holding, subsidiary, associate, or investing company |
| IND AS 24 | 1.A person or close family member who has:
2.Entities that are:
|
| SEBI (LODR) Regulation, 2015 | 1. Promoters and members of promoter group
2. Any person or entity holding:
3. Shareholding may be direct or beneficial as per Section 89 of Companies Act |
Decoding Related Party Transactions (RPTs)
A Related Party Transaction (RPT) typically refers to a transfer of resources, services, or obligations between a company and a related party. While the term is central to governance and compliance, its interpretation and approval process vary under different legal frameworks.
1. Under the Companies Act, 2013
Interestingly, the Companies Act, 2013does not define “Related Party Transaction” explicitly. Instead, it lists specific transaction categories under Section 188 that require corporate approvals when entered into with related parties. These include:
a) Sale, purchase, or supply of goods or materials
b) Selling or buying property
c) Leasing property
d) Availing or rendering services
e) Appointment of agents
f) Underwriting obligations
g) Related party appointments to office or place of profit
Approval Matrix:
1.If the transaction is in the ordinary course of business and at arm’s length price → Audit Committee (AC) approval is sufficient.
2. If it is either *not in the ordinary course of business* or *not at arm’s length* → Board of Directors (BOD) approval is required.
3. If the transaction exceeds prescribed thresholds (as per Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014) → Shareholders’ approval is mandatory via special resolution. (defined in table below)
2. Under SEBI (LODR) Regulations, 2015
SEBI takes a broader view of RPTs under Regulation 2(zc), encompassing any transfer of resources, services, or obligations, regardless of whether a price is charged. The scope includes transactions between:
1.Listed entity and its related party
2. Listed entity and a subsidiary’s related party
3. Subsidiary and its own related party
4. Subsidiary and a related party of the listed entity
5. Listed entity or any of its subsidiaries on one side, and a third party on the other side — where the benefit of the transaction accrues to a related party of the listed entity or subsidiary
This expansive definition ensures indirect transactions benefiting related parties are also brought under regulatory scrutiny. Approval requirements under SEBI include mandatory vetting by the Audit Committee and, in certain cases, shareholders’ approval through special resolution (excluding votes by related parties).
Approval Matrix for Related Party Transactions in Listed Companies
The regulatory landscape for Related Party Transactions (RPTs) in listed companies is governed by a layered approval structure designed to ensure accountability and fairness. Depending on the nature, value, and parties involved, different levels of corporate oversight are required — ranging from audit committee approval to board and shareholder consent. The objective is to align such transactions with governance norms while safeguarding the interests of shareholders.
This section outlines the approval framework applicable to listed entities under the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, highlighting when approvals are mandatory and by whom.
| Regulation/Act | Audit Committee | Board of Director | Shareholder |
| Companies Act, 2013 | All Transaction | 1. All Transaction in case no Audit Committee is incorporated, OR
2. Transaction under 188 and not in arms length basis OR not in ordinary course of business |
Transaction under 188, not in ordinary course of business or not on arms length basis, if exceed limit as defined below:
1. sale, purchase or supply of any goods or material, directly or through appointment of agent, amounting to ten percent or more of the turnover of the company 2. selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten percenter more of net worth of the company 3. leasing of property any kind amounting to ten percent or more of the turnover of the company 4. availing or rendering of any services, directly or through appointment of agent, amounting to ten percent or more of the turnover of the company 5. appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and a half lakh rupees 6. remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding one percent of the net worth |
| Listing Regulation | All Transaction | All material related party transactions. | All material related party transactions.
Material Related Party Transaction – Transaction taken together or individually during a financial year exceed Rupees 1000 Crore or 10% of annual consolidated turnover, whichever is lower. |
Exceptions and Exemptions: When RPT Rules Don’t Apply
While Related Party Transactions (RPTs) are subject to strict governance due to the inherent risk of conflicts of interest, not all transactions involving related parties fall under regulatory scrutiny. Both the Companies Act, 2013 and SEBI Listing Regulations carve out specific exceptions and exemptions to ensure that routine, non-abusive transactions are not burdened by unnecessary compliance. This section explores two such categories: transactions that are entirely excluded from the definition of RPTs, and those that, while technically classified as RPTs, do not require board or shareholder approval under certain conditions.
Broadly, these exceptions fall into two buckets:
1. Transactions Not Covered Under RPT Definition
These transactions, despite involving related parties, are not considered RPTs under the regulatory framework:
1.Issue of specified securities on a preferential basis
2. Corporate actions extended uniformly to all shareholders, including:
3. Dividend payments
4. Sub-division or consolidation of securities
iii. Rights issues or bonus issues
1.Buy-back of securities. Retail purchases by directors or employees from the listed entity or its subsidiary, without a business relationship, and on terms uniformly applicable to all employees and directors
2. Transactions Covered Under RPT But Exempt from Approval
Transactions between a holding company and its wholly-owned subsidiary, these transactions qualify as RPTs but do not require board or shareholder approval due to their nature. Provided they are not deemed material under SEBI LODR or conducted on arm’s length terms under the Companies Act, 2013
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