Introduction
Related party transactions occupy a uniquely contested space in corporate governance theory. On one hand, transactions between a company and its promoters, subsidiaries, or affiliates may be commercially necessary and even beneficial: intragroup financing is cheaper and faster than external debt, procurement from a group company may offer reliability and scale unavailable in the open market, and shared services arrangements reduce overheads. On the other hand, related party transactions are the mechanism through which controlling shareholders most commonly extract value from minority shareholders, and the history of Indian corporate governance is well-stocked with examples of promoter groups using intragroup transactions to transfer assets at non-market prices, channel group liquidity, and extract fees through management service agreements that bear no relationship to services actually rendered.
The Securities and Exchange Board of India recognised this dual character in its successive amendments to the LODR (Listing Obligations and Disclosure Requirements) Regulations, most significantly in the 2021 and 2022 rounds of amendments that substantially expanded the scope of the related party transaction framework. This article analyses the architecture of the amended regime, examines its enforcement reality against the backdrop of high-profile governance controversies, and considers whether the framework as currently designed is capable of achieving its governance objectives.
Legal Framework
The SEBI (LODR) Regulations 2015 were amended with effect from April 2022 to introduce some of the most significant changes to the related party transaction framework since the original 2015 regulations. The key changes are worth setting out with precision because the details matter for understanding both the regulatory intent and the enforcement gaps.
First, the definition of “related party” under the amended LODR is now substantially broader than the definition under Section 2(76) of the Companies Act 2013. The LODR definition covers all entities in which a promoter, promoter group entity, or director of the listed company has a significant (10% or more) interest, regardless of whether there is any controlling relationship. This change was designed to prevent promoters from routing related party transactions through thinly held holding companies or trusts that technically fell outside the Companies Act definition.
Second, the materiality threshold below which related party transactions can be approved by the audit committee without shareholder approval was reduced from 10% of annual consolidated turnover to 2% of turnover or Rs. 1,000 crore, whichever is lower. This substantially expands the universe of transactions requiring shareholder approval, imposing a compliance burden but also creating a meaningful monitoring mechanism.
Third, and most consequentially, the amended regulations require that the majority of votes cast in favour of a related party transaction resolution must come from shareholders other than the related parties themselves. This “majority of minority” requirement is designed to prevent controlling shareholders from approving their own extraction transactions by virtue of their voting majority. The NCLT in several cases under the Companies Act had earlier dealt with similar issues in the context of oppression and mismanagement petitions, but the LODR amendment addresses the issue at the point of approval rather than after the fact.
Fourth, the regulations now cover transactions by the listed company’s subsidiaries with the subsidiaries’ related parties, capturing a significant loophole through which intragroup transactions had previously been structured at a subsidiary level to avoid the LODR thresholds.
Judicial Developments
The interface between SEBI’s LODR framework and the NCLT’s jurisdiction under the Companies Act has been a recurring source of jurisdictional uncertainty. The NCLT has jurisdiction over oppression and mismanagement petitions under Sections 241 and 242 of the Companies Act, which can challenge related party transactions as part of a broader pattern of conduct prejudicial to the company’s interests. SEBI has jurisdiction over disclosure failures and LODR non-compliance by listed companies. Where a related party transaction involves both a failure to disclose to shareholders and substantive unfairness to minority shareholders, both regulators may be engaged simultaneously.
The Supreme Court’s decision in Tata Consultancy Services v. Cyrus Investments (2021) provides important guidance on the standard of review applicable to related party transactions challenged in oppression and mismanagement proceedings. The court observed that intragroup transactions that are not at arm’s length and that systematically favour the controlling group to the detriment of minority shareholders can constitute the kind of prejudicial conduct that justifies NCLT intervention, but that the court should not second-guess legitimate business decisions merely because they involve related parties. The court’s approach, borrowing from Delaware’s entire fairness doctrine without explicitly adopting it, requires both fair dealing (proper process) and fair price (substantive fairness) for challenged related party transactions.
SEBI’s enforcement in the related party transaction space has historically been limited. Enforcement actions for LODR RPT disclosure failures are common, but actions for substantive governance failures in approving unfair related party transactions are rare. The Adani group disclosures following Hindenburg Research’s report in January 2023 prompted SEBI to examine the group’s related party transaction disclosures, and the SEBI-appointed expert committee reviewed the adequacy of the framework. The expert committee’s report, submitted to the Supreme Court in May 2023, noted that SEBI had identified several transactions that warranted further investigation but that the statutory definition of related party was too narrow to capture all the relationships that appeared to be relevant.
The Vedanta delisting attempt (2020 to 2021) illustrated a different dimension of the promoter-minority interface. Though technically a delisting rather than a related party transaction, the attempt raised fundamental questions about the promoter’s use of corporate structure and intragroup transactions to make continued minority ownership less attractive, prompting minority resistance and eventual failure of the delisting at the shareholder vote. The episode highlighted that the governance concerns around promoter extraction and minority value are not confined to the RPT approval process but are structural features of India’s concentrated ownership model.
Contemporary Issues and Analysis
The independent director’s role in RPT oversight is a critical variable in the effectiveness of the amended framework. Under the LODR, related party transactions must be reviewed by the audit committee, which is required to have a majority of independent directors. In theory, the independent directors’ review is the first line of defence against abusive related party transactions. In practice, the effectiveness of this review depends on the quality of information provided to the audit committee, the independence of the directors from the promoter group, and the directors’ willingness to question and if necessary reject transactions proposed by management.
Research on independent director voting patterns in India consistently finds that audit committee rejections of related party transactions are rare. This is partly a function of the selection problem: promoters have substantial influence over the nomination of independent directors, creating a structural bias toward candidates who are unlikely to displace the promoter’s preferred transactions. The Nomination and Remuneration Committee, which is responsible for recommending independent director appointments, is itself subject to promoter influence in most Indian listed companies.
Institutional investor engagement with RPT resolutions has increased materially since 2020, driven by stewardship code obligations on mutual funds and foreign portfolio investors. Proxy advisory firms, most significantly Institutional Investor Advisory Services (IiAS) and Stakeholder Empowerment Services (SES), have developed detailed RPT review frameworks and regularly recommend votes against RPT resolutions they consider inadequately justified. However, the proportion of institutional votes actually cast against management-sponsored RPT resolutions remains low relative to the frequency of adverse proxy advisory recommendations, suggesting that institutions, while increasingly willing to flag governance concerns, continue to default to management approval in many cases.
The “majority of minority” requirement introduced in 2022 has had a visible effect on the RPT approval process, with several large companies reporting that RPT resolutions have failed to achieve the required majority of minority votes and subsequently being required to seek fresh approval with enhanced disclosure. However, the requirement does not prevent companies from re-submitting the same transaction after cosmetic process improvements, and the monitoring of post-approval transaction execution remains limited.
Comparative and International Perspective
The UK Financial Conduct Authority’s Listing Rules contain a sophisticated related party transaction regime applicable to premium-listed companies. Transactions with related parties above specified thresholds require a shareholder circular containing detailed financial information, an independent valuation, and a statement by a “sponsor” (a regulated financial institution) confirming the fairness of the terms. Shareholder approval is required, and related parties may not vote. The UK approach places greater emphasis on the quality of disclosure and external verification than on the structural majority-of-minority voting mechanism, though the two are complementary rather than alternative approaches.
The Delaware entire fairness standard, applicable to interested director transactions in US corporations, requires that transactions involving controlling shareholders demonstrate both fair dealing and fair price. The Delaware Court of Chancery has developed a rich body of case law on what fair dealing requires in terms of process, including the use of a special committee of independent directors with separate legal and financial advisers and the exclusion of the controlling shareholder from negotiations. Importantly, Delaware also provides a procedural safe harbour: if the transaction is approved by a properly constituted special committee of independent directors AND by a majority of disinterested shareholders, judicial review shifts to the more deferential business judgment standard. This creates a strong incentive for companies to use good process.
India’s framework lacks the procedural safe harbour that would encourage companies to invest in genuinely independent review processes. The current LODR requirements create mandatory thresholds but do not offer companies any benefit, in terms of reduced judicial scrutiny, for voluntarily adopting enhanced governance procedures.
Practical and Policy Implications
The enforcement reality of India’s RPT framework is characterised by strong disclosure requirements and weak substantive review. SEBI can and does penalise companies for failure to obtain required approvals or for inadequate disclosure in shareholder notices. However, SEBI lacks the power to retrospectively unwind a related party transaction that has been approved by shareholders, even where the approval was obtained through misleading disclosure. The NCLT has the power to grant such relief in oppression proceedings but typically requires a pattern of prejudicial conduct rather than a single unfair transaction.
This enforcement gap means that the amended LODR framework functions primarily as a deterrent through disclosure and approval requirements rather than through substantive transaction review. Its effectiveness depends entirely on the quality of shareholder engagement, which in turn depends on the availability and quality of information, the sophistication of institutional investors, and the willingness of minority shareholders to exercise their voting rights.
The concentration of promoter ownership in Indian listed companies, with average promoter stakes exceeding 50% across the NSE 500, means that the “majority of minority” requirement is critical to the framework’s effectiveness. In companies where institutional and public minority shareholders collectively hold more than 50% of the non-promoter float, the requirement can meaningfully constrain abusive RPTs. In companies where the non-promoter float is predominantly held by retail investors with low engagement, the requirement may be satisfied by relatively few institutional votes.
Suggestions and Reforms
The RPT framework would benefit from several targeted reforms. First, SEBI should develop a procedural safe harbour that reduces judicial scrutiny of RPTs approved by a properly constituted independent committee and a majority of disinterested shareholders, modelled on the Delaware approach. This would create incentives for good process rather than merely penalties for bad outcomes.
Second, the valuation requirements for RPTs should be strengthened. Currently, companies are required to provide a justification for the terms of an RPT but there is no mandatory independent valuation for transactions below a specified threshold. Mandatory independent valuation for all RPTs above Rs. 100 crore would substantially improve the information available to shareholders and proxy advisers.
Third, SEBI should require post-approval monitoring of significant RPTs, with annual reports to the audit committee and shareholders on actual performance of the transaction relative to the terms disclosed at approval. This would address the current enforcement gap around post-approval execution.
Fourth, the NCLT and SEBI should develop a formal coordination mechanism to avoid duplication and jurisdictional uncertainty in RPT-related proceedings, ensuring that regulatory resources are deployed efficiently and that affected minority shareholders have a clear enforcement pathway.
Conclusion
India’s amended RPT framework is a substantial improvement on its predecessor but remains structurally dependent on shareholder engagement that is often insufficient in depth and sophistication to police the complex related party landscapes of Indian listed conglomerates. The Hindenburg controversy highlighted the limits of even extensive disclosure requirements in the face of opaque ownership structures. Reform efforts should focus on enhancing procedural incentives for genuine independent review, strengthening post-approval accountability, and creating a cleaner interface between SEBI’s regulatory enforcement and the NCLT’s judicial remedies.
