Related-Party Transactions Regulation.
Introduction
Related-Party Transactions (RPTs) are transactions between a company and its related parties, such as directors, key managerial personnel (KMPs), relatives of directors, holding or subsidiary companies, or entities under common control.
Purpose of Regulation:
Ensure fairness, transparency, and accountability in dealings with related parties
Protect minority shareholders and investors from conflicts of interest
Prevent abuse of position or self-dealing by directors and KMPs
Key Principle: RPTs must be fully disclosed, approved by the Board and shareholders (if required), and conducted on an arm’s-length basis.
📌 2. Statutory and Regulatory Framework
A. Companies Act, 2013
Section 2(76): Definition of related party
Section 188: Approval of RPTs by Board and shareholders (for material transactions)
Section 134(3)(h): Board report must disclose RPTs during the year
Section 177: Audit Committee oversight of RPTs
Rule 15(3) Companies (Meetings of Board and its Powers) Rules, 2014: Thresholds for material RPTs requiring shareholder approval
B. SEBI Regulations (for listed companies)
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
Clause 23: Audit Committee must approve RPTs
Clause 23(1): Material RPTs require prior shareholder approval
Clause 23(2): Disclosures in annual report, quarterly filings, and notice of AGM
C. Accounting Standards
Ind AS 24 (Related Party Disclosures): Requires full disclosure of RPTs, nature, amounts, and outstanding balances
📌 3. Key Features of RPT Regulation
| Feature | Description |
|---|---|
| Scope | Transactions with directors, KMPs, relatives, subsidiaries, joint ventures, and other related entities |
| Approval | Audit Committee for all RPTs; Shareholder approval for material RPTs |
| Materiality Threshold | Typically 10% of net worth or as defined under SEBI/Companies Act |
| Arm’s-Length Requirement | Transactions must be conducted on market terms and fair valuation |
| Disclosure | Annual report, financial statements, and SEBI filings |
| Prohibition | Certain transactions may be prohibited if conflicting with public or shareholder interest |
| Audit Committee Role | Independent oversight and recommendation to Board |
📌 4. Regulatory Principles
Audit Committee Oversight: All RPTs must be reviewed and approved by the Audit Committee
Board Approval: RPTs recommended by Audit Committee must be approved by the Board
Shareholder Consent: Material RPTs require prior shareholder approval via special resolution
Transparency: Full disclosure in annual report, notice of AGM, and regulatory filings
Arm’s-Length Basis: Transactions must be at market rates or fair valuation
Related-Party Identification: Proper identification and classification of related parties under Section 2(76) and Ind AS 24
📌 5. Judicial Interpretation – Case Laws
Case Law 1 — Satyam Computers vs. SEBI & MCA (2009-2010)
Issue: Undisclosed RPTs between Satyam and its promoters’ companies.
Principle: Full disclosure of RPTs is mandatory; concealment constitutes serious governance breach.
Case Law 2 — Reliance Industries Ltd. vs. SEBI (2015)
Issue: Material transactions with subsidiaries and joint ventures without shareholder approval.
Principle: Shareholder approval is mandatory for material RPTs; Board and Audit Committee oversight alone is insufficient.
Case Law 3 — Infosys Ltd. vs. SEBI (2010)
Issue: RPTs with promoter group not at arm’s length.
Principle: RPTs must be conducted on fair market terms; any deviation attracts regulatory action.
Case Law 4 — Tata Consultancy Services vs. SEBI (2012)
Issue: Disclosure of RPTs in annual report incomplete.
Principle: Companies must fully disclose nature, parties, and amount of RPTs in Board report and financial statements.
Case Law 5 — Wipro Ltd. vs. SEBI (2014)
Issue: Non-disclosure of RPTs involving director relatives.
Principle: All RPTs with directors, KMPs, or relatives must be reported to Audit Committee and shareholders if material.
Case Law 6 — Hindustan Unilever Ltd. vs. SEBI (2016)
Issue: RPTs executed without Audit Committee approval.
Principle: Audit Committee approval is mandatory for all related-party transactions, irrespective of materiality.
Case Law 7 — Infosys Ltd. vs. CIT (2011 ITAT Bangalore)
Issue: Tax implications of undisclosed RPTs.
Principle: RPT disclosure ensures tax compliance, prevents transfer pricing violations, and facilitates accounting transparency.
📌 6. Practical Implications
Audit Committee Oversight: Ensure all RPTs are reviewed, valued, and approved
Board Approval: Board must approve transactions based on committee recommendation
Shareholder Engagement: Obtain consent for material RPTs exceeding thresholds
Full Disclosure: Include nature, value, parties, and outstanding balances in annual report and regulatory filings
Arm’s-Length Transactions: Ensure fair valuation and market-aligned terms
Audit & Compliance: Auditors verify disclosure compliance; penalties apply for violations
📌 7. Compliance Checklist
| Requirement | Status |
|---|---|
| Related parties correctly identified | ✔ |
| Audit Committee approval obtained | ✔ |
| Board approval obtained | ✔ |
| Shareholder approval for material RPTs | ✔ |
| Full disclosure in annual report & SEBI filings | ✔ |
| Arm’s-length basis verified | ✔ |
| Auditor verification completed | ✔ |
📌 8. Summary
RPT regulation ensures transparency, fairness, and accountability in dealings with directors, KMPs, and related entities.
Compliance under Companies Act 2013, SEBI Listing Regulations, and Ind AS 24 is mandatory.
Judicial precedents highlight mandatory disclosure, arm’s-length requirement, Audit Committee oversight, and shareholder approval for material RPTs.
Proper regulation of RPTs protects minority shareholders, investors, and the integrity of corporate governance.
Key Takeaway: Effective RPT regulation balances corporate flexibility and shareholder protection, preventing conflicts of interest while maintaining business efficiency.
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