Related Party Transactions under companies act, 2013 and SEBI (LODR) Regulations, 2015 - Legal Service India

Related Party Transactions (RPTs) occur when a business engages in a financial deal or arrangement with an entity or individual with whom it shares a pre-existing relationship. These parties often include major shareholders, subsidiaries or key management personnel. RPTs are a standard part of corporate operations, often streamlining internal supply chains or financing. They present a unique challenge for transparency.

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Because these deals do not always occur at arm’s length, they can potentially lead to conflicts of interest. Consequently, a robust regulatory framework and disclosure requirements are essential to ensure that such transactions are conducted fairly and do not prejudice the interests of minority stakeholders or the integrity of the market.

In India, the Companies Act, 2013 and SEBI (LODR) Regulations, 2015 are the major laws that deal with the related party transactions. These laws aim to ensure that RPTs are disclosed, reviewed and approved appropriately.

In terms of Section 2(76), “related party”, with reference to a company, means the following:

A director or his relative.
Key managerial personnel or his relative.
A firm, in which a director, manager or his relative is a partner.
A private company in which a director or manager or his relative is a member or director.
A public company in which a director or manager is a director or holds, along with his relatives, more than two per cent. of its paid-up share capital.
Any corporation whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager.
Any person on whose advice, directions or instructions a director or manager is accustomed to act.

Provided that nothing in sub-clauses (6) and (7) shall apply to the advice, directions or instructions given in a professional capacity.
Any company which is:
- A holding, subsidiary or an associate company of such company; or
- A subsidiary of a holding company to which it is also a subsidiary; or
- An investing company or the venturer of the company.
Such other person as may be prescribed.

Category	Description
Direct Relationship	Director or key managerial personnel and their relatives.
Business Association	Firms and companies linked with directors or managers.
Control and Influence	Entities acting under the advice, directions or instructions of directors or managers.
Corporate Structure	Holding, subsidiary, associate and investing companies.

‘Related Party Transaction’ means a transaction involving a transfer of resources, services, or obligations between:

A listed entity or any of its subsidiaries on one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or
A listed entity or any of its subsidiaries on one hand and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries.

Provided that the following transactions shall not be regarded as a related party transaction:

The issue of specified securities on a preferential basis is subject to compliance with the requirements as provided under SEBI (ICDR) Regulations, 2018.

The following corporate actions by the listed entity which are uniformly offered to all shareholders in proportion to their shareholding:

Payment of dividend.
Subdivision and consolidation of securities.
Issuance of securities by way of right issue or a bonus issue.
Buy-back of securities.
Acceptance of fixed deposits by bank or non-banking finance companies at the terms uniformly applicable to all the shareholders and public subject to disclosure was the same.

Along with the disclosure of related party transactions every 6 months you just exchange talk. ComSearch is a format as specified by the board.

The company is not to engage in related party transactions.

Under section 188 (1), a company cannot enter into any contract or arrangement with the related parties with respect to the following specific transactions without the consent of the board of directors given by a resolution at a meeting:

Transactions Requiring Board Approval

Sale, purchase or supply of any goods or materials.
Selling or otherwise disposing of or buying property of any kind.
Leasing of property of any kind.
Availing of or rendering of any services.
Appointment of any agent for purchase for sale of goods, materials, commerce services, or property.
A related party’s appointment to any office or place of profit in the company commits a subsidiary company or associate company.
Underwriting the subscription of any securities or derivatives thereof of the company.

While Board approval is the baseline, Rule 10 of the Companies (Meetings of Board and its Rules) 2014 mandates that an effect transaction exceeds specific financial thresholds; it requires the prior approval of shareholders by way of ordinary resolution.

Thresholds for Shareholder Approval

Transaction Type	Threshold for Shareholder Approval
Sale, purchase or supply of goods/materials	Exceeding 10% of the turnover of the company.
Selling/disposing of or buying property.	Exceeding 10% of the net worth of the company.
Leasing of property.	Exceeding 10% of the turnover of the company.
Availing and rendering of services.	Exceeding 10% of the turnover of the company.
Appointment to office/place of profit	Monthly remuneration exceeding Rs.2.5 lakhs.
Underwriting remuneration.	Exceeding 1% of the net worth of the company.

Important Provisos To Section 188(1)

The act provides several exceptions and conditions that must be taken into consideration.

Ordinary Course Of Business And Arm’s-Length Transactions

The requirements of section 188(1) do not apply to any transactions entered into by the company in its ordinary course of business.
A transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

No member of the company shall vote on an ordinary resolution to approve any contract or arrangement which may be entered into by the company.
However, the exception is that this restriction does not apply to companies in which 90% or more members, in number, are relatives of promoters or are related parties.

Consequences Of Non-Compliance

If a contract is entered into without obtaining consent (board and shareholders) and is not ratified to the next three months Such contract shall be voidable at the option of the board.

If the contract is with a related party to any director or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred.

Penalties are specified below.

Penalties For Listed Companies

A director or any other employee may be punishable with imprisonment up to one year or a fine up to Rs.5 lakhs or both.

Penalties For Other Companies

Fine, which shall not be less than Rs.25,000 but which may extend to Rs.5 lakh.

Regulation 23 of SEBI (LODR) Regulations, 2015

Regulation 23 governs related party transactions. Its primary objective is to ensure transparency and protect the interests of minority shareholders by requiring rigorous approval processes and disclosures for transactions between a listed entity and its related parties.

A listed entity shall formulate a policy on materiality of a related party transaction and on dealing with the related party transaction. Including clear threshold limits duly approved by the board of directors, such policy shall be reviewed by the board of directors at least once in every three years and updated accordingly:

Provided that a transaction with a related party shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year exceeds rupees one thousand crore or ten per cent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity, whichever is lower.

Apart from the above, a transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year exceed five per cent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

Key Thresholds Under Regulation 23

Particulars	Materiality Threshold
General Related Party Transactions	Exceeds Rupees 1,000 Crore or 10% of annual consolidated turnover, whichever is lower
Brand Usage or Royalty Transactions	Exceeds 5% of annual consolidated turnover

Approval of Audit Committee

All related party transactions and subsequent material modifications shall require prior approval of the audit committee of the listed entity.

Provided that only those members of the audit committee, who are independent directors, shall approve related-party transactions.

Definition

‘Omnibus approval’ refers to a pre-approval granted by the Audit Committee for repetitive related-party transactions.

Conditions for Omnibus Approval

Following are the conditions subject to which the Audit Committee may grant omnibus approval for related party transactions:

Such approval shall be applicable only with respect to transactions that are repetitive in nature.
The audit committee shall satisfy itself regarding the need for omnibus approval, and such approval shall be in the interest of the company.

Details Required in Omnibus Approval

The omnibus approval shall specify:

The name(s) of the related party, nature of transaction, period of transaction, and maximum amount of transactions that shall be entered into;
The indicative base price / current contracted price and the formula for variation in the price, if any; and
Such other conditions as the audit committee may deem fit.

Where the need for omnibus approval cannot be foreseen and the information is not available, the audit committee shall grant approval for the transaction the value of which cannot exceed one crore per transaction.

Validity of Omnibus Approval

Such omnibus approval shall be valid for a period not exceeding one year and shall require fresh approval after the expiry of one year.

All material related-party transactions and subsequent material modifications as defined by the audit committee shall require prior approval of the shareholders through resolution, and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.

Important Points to Note

Prior shareholder approval is mandatory for all material related-party transactions.
Material modifications also require approval.
No related party can vote on such resolutions.
The restriction applies whether the entity is related to the specific transaction or not.

Key Exemptions Under Regulation 23

Regulation 23 of the SEBI (LODR), 2015, does not apply to the following transactions:

Transactions entered into between two government companies.
Transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.
Transactions entered into between two wholly owned subsidiaries of the listed holding company, whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

Summary of Exempted Transactions

Type of Transaction	Exemption Available
Transactions between two government companies	Yes
Transactions between holding company and wholly owned subsidiary	Yes
Transactions between two wholly owned subsidiaries	Yes

Related party transactions pose a great challenge to governance and regulatory compliance, especially in promoter-driven companies where conflicts of interest are more likely. Effective board oversight and stakeholder communication are necessary to manage these risks. Global investors are increasingly considering related-party transactions and related governance as key factors in the assessment of risks involved in a company.

An effective governance mechanism supported by proper approvals, disclosures, and independent oversight ensures that related-party transactions are conducted at arm’s length and in the best interest of the company.

Strong corporate governance reduces risks in related-party transactions.
Independent oversight improves transparency and accountability.
Proper disclosures enhance investor confidence.
Regulatory compliance is essential for listed entities.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Companies Act, 2013.
ICSI Environmental Social Governance Module (CS Professional).

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