Related Party Transaction Approval Process
I. Meaning and Rationale of Related Party Transactions
Definition
A Related Party Transaction (RPT) is a transaction between a company and a related party, which may include:
Directors
Key Managerial Personnel (KMP)
Relatives
Holding, subsidiary, associate companies
Entities with significant influence
Objective of Regulation
Prevent conflict of interest
Protect minority shareholders
Ensure arm’s length and fairness
Promote transparency in corporate governance
II. Statutory Framework Governing RPTs
1. Companies Act, 2013
(a) Definition of Related Party
Section 2(76) – Inclusive definition covering persons and entities
(b) Specified Transactions
Section 188(1) includes:
Sale, purchase or supply of goods or materials
Selling or buying property
Leasing of property
Availing or rendering services
Appointment to office or place of profit
Underwriting of securities
2. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (for listed companies)
Regulation 2(1)(zc) – RPT definition
Regulation 23 – Comprehensive approval and disclosure regime
SEBI regime is stricter than Companies Act and prevails for listed entities.
III. Approval Process Under Companies Act, 2013
Step 1: Identification of Related Party
Verify relationship under Section 2(76)
Track changes dynamically (shareholding, directorship)
Step 2: Audit Committee Approval (If Applicable)
Section 177(4)(iv)
Mandatory for:
Listed companies
Certain public companies
Approval may be:
Prior approval
Omnibus approval (subject to conditions)
Step 3: Board Approval
Resolution at Board Meeting
Interested director must disclose interest and abstain from discussion and voting
Section 184 & 188
Step 4: Shareholders’ Approval (Special Resolution)
Required when:
Transaction value exceeds prescribed thresholds
Transaction is not in ordinary course of business or not at arm’s length
Related parties cannot vote on such resolution.
Step 5: Disclosure
Board’s Report (Section 134)
Form AOC-2
Financial statements
IV. Approval Process Under SEBI LODR (Listed Companies)
A. Audit Committee
Mandatory prior approval
Only independent directors to approve
B. Material RPTs
Shareholders’ approval required
All related parties to abstain from voting
C. Enhanced Disclosures
Quarterly disclosures to stock exchanges
Policy on RPTs mandatory
V. Arm’s Length and Ordinary Course Tests
Arm’s Length Transaction
Pricing and terms comparable to unrelated parties
No undue benefit
Ordinary Course of Business
Consistent with objects
Regular business activity
Historical practice
Failure of either triggers shareholder approval.
VI. Consequences of Non-Compliance
Transaction is voidable at company’s option
Directors may be:
Indemnified liability
Required to disgorge profits
Regulatory penalties
Oppression and mismanagement claims
Criminal liability in case of fraud
VII. Judicial Interpretation of RPTs
Courts scrutinise:
Substance over form
Fairness and bona fides
Disclosure quality
Impact on minority shareholders
VIII. Leading Case Laws (At Least 6)
1. Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan (2005)
Held:
Directors owe fiduciary duties
Transactions benefiting directors at company’s expense constitute oppression
Relevance:
Foundational case on conflict of interest
2. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981)
Held:
RPTs must be fair and in company’s interest
Majority cannot misuse power to prejudice minority
3. Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. (2021)
Held:
Corporate governance norms and approval mechanisms crucial
Board actions involving related parties scrutinised for fairness
4. S.P. Jain v. Kalinga Tubes Ltd. (1965)
Held:
Abuse of powers through related party arrangements constitutes oppression
Courts may interfere despite formal approvals
5. Globe Motors Ltd. v. Mehta Teja Singh & Co. (2017)
Held:
Interested directors must abstain
Failure invalidates approval process
6. Nanalal Zaver v. Bombay Life Assurance Co. Ltd. (1950)
Held:
Fiduciary standards apply strictly to directors
Transactions must withstand fairness scrutiny
7. ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. (2010)
Held:
Violation of internal approval policies in related transactions leads to personal liability
8. V.S. Krishnan v. Westfort Hi-Tech Hospital Ltd. (2008)
Held:
Court will examine substance of related transactions
Technical compliance insufficient if transaction is unfair
IX. Best Practices for RPT Governance
Maintain updated related party register
Adopt detailed RPT policy
Independent valuation and benchmarking
Robust audit committee scrutiny
Transparent disclosures
Periodic review of omnibus approvals
X. Conclusion
The RPT approval process in India reflects a shift from mere procedural compliance to substantive fairness. While statutory approvals are mandatory, courts look beyond formality to assess bona fides, arm’s length pricing, and minority protection. Proper identification, layered approvals, and transparent disclosures are critical to ensure enforceability and governance integrity.
RELATED Blog
comments