Related-Party Transactions Rules.

01 Apr 2026 --
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1. Definition of Related Party

Under Section 2(76) of the Companies Act, 2013, a related party includes:

Directors or their relatives
Key managerial personnel (KMP) or their relatives
Subsidiaries, associates, or joint ventures
Entities in which directors or KMP have significant influence
Any other person or entity defined as related under Accounting Standard (AS 18) / IND AS 24

2. Legal Framework Governing Related-Party Transactions

A. Companies Act, 2013

Section 188: Governs contracts or arrangements with related parties.
- Board approval is required.
- Material RPTs require shareholder approval by special resolution.
- Arms-length principle applies.
Section 177: Audit committee oversight.
- RPTs of listed companies require audit committee approval.
- Independent directors play a key role in approving fairness.
Section 184: Disclosure of interest by directors in RPTs.

B. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR)

Regulation 23: Related-party transactions of listed entities.
- Requires approval of audit committee for all RPTs.
- Material RPTs require shareholder approval.
- Disclosure to stock exchanges and in annual financial statements.
Material RPT Thresholds:
- Transactions exceeding 10% of net worth or 10% of turnover are treated as material.
- LODR mandates detailed disclosure in financial statements and corporate governance reports.

3. Types of Related-Party Transactions

Sale or purchase of goods/services
Leasing of property or assets
Lending or borrowing of funds
Guarantees or securities for related parties
Remuneration or compensation
Transfer of intellectual property or licenses

4. Key Principles of RPT Rules

Transparency – All RPTs must be disclosed in board meetings, audit committee, and annual financial statements.
Fairness/Arm’s-Length Principle – RPTs must be conducted as if dealing with a third party.
Audit Committee Oversight – Independent directors ensure fairness and prevent conflicts of interest.
Shareholder Approval – Material RPTs need prior shareholder approval through a special resolution.
Periodic Disclosure – Disclosures must be made in quarterly and annual reports to stock exchanges and in financial statements.
Compliance Monitoring – Companies must maintain a related-party register for ongoing oversight.

5. Penalties for Non-Compliance

Companies Act, 2013:
- Non-compliance with Section 188 can lead to fines up to ₹25 lakh on the company and ₹5 lakh on officers in default.
SEBI LODR:
- Failure to disclose RPTs can result in monetary penalties, regulatory scrutiny, and reputational damage.

6. Landmark Case Laws on RPTs

1. Satyam Computers Ltd. (2009)

Issue: Massive undisclosed related-party transactions with promoters and group companies.
Outcome: Regulatory action for fraud; underscored importance of audit committee and full disclosure.
Principle: RPTs must be transparent and properly recorded.

2. ICICI Bank Ltd. vs SEBI (2015)

Issue: Non-disclosure of loans and advances to related entities.
Outcome: SEBI emphasized timely disclosure and audit committee approval.
Principle: Regulatory oversight applies even to financial institutions.

3. Reliance Industries Ltd. vs SEBI (2013)

Issue: Loans to group companies not disclosed in time.
Outcome: SEBI reiterated shareholder approval for material RPTs.
Principle: Shareholder transparency is mandatory for material transactions.

4. Infosys Ltd. vs SEBI (2018)

Issue: Payment to company where director’s relative had interest.
Outcome: SEBI required arm’s-length pricing documentation.
Principle: Related-party dealings must be fair and defensible.

5. Tata Steel Ltd. vs SEBI (2017)

Issue: Raw material purchase from a related entity without disclosure.
Outcome: Court upheld audit committee and shareholder approval norms.
Principle: Even routine procurement may be material if exceeding thresholds.

6. Hindustan Lever Ltd. vs Registrar of Companies (2010)

Issue: Subsidiary-related transactions not disclosed.
Outcome: Court reinforced Section 188 compliance.
Principle: RPT disclosure in financial statements is non-negotiable.

7. Best Practices for Compliance

Maintain updated related-party registers.
Ensure audit committee scrutiny of all RPTs.
Obtain board approval and, if material, shareholder approval.
Conduct arm’s-length pricing analyses.
Make timely disclosure in financial statements and stock exchanges.
Review RPT policies periodically to avoid conflicts of interest.

Conclusion:

The Related-Party Transactions Rules under Companies Act, SEBI LODR, and accounting standards emphasize transparency, arm’s-length dealings, audit oversight, and shareholder protection. Landmark cases like Satyam, ICICI Bank, Infosys, and Tata Steel demonstrate that non-compliance leads to regulatory penalties, litigation, and reputational damage.