Corporate Governance Requirements For Related Party Transactions.
1. Introduction
Related Party Transactions (RPTs) are transactions between a company and its related parties, which could include promoters, directors, key managerial personnel, or their relatives. While RPTs are common and often legitimate, they carry a risk of conflict of interest, misuse of corporate resources, or oppression of minority shareholders.
Corporate governance frameworks under the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 impose strict requirements on RPTs to ensure transparency, fairness, and shareholder protection.
2. Legal Framework Governing RPTs
A. Companies Act, 2013
Section 188:
Governs contracts or arrangements with related parties, including purchase, sale, lease, and remuneration.
Requires board approval, and in some cases, shareholder approval if transactions exceed prescribed thresholds.
Section 177:
Mandates the Audit Committee to review and approve material RPTs.
Schedule V & Rules:
Defines thresholds, disclosure requirements, and exemptions for certain transactions.
B. SEBI LODR Regulations, 2015
Regulation 23:
Listed companies must obtain prior approval of the audit committee for all material RPTs.
Requires prior approval of shareholders if transactions exceed 10% of annual consolidated turnover.
Disclosures of RPTs must be made in annual reports and on stock exchanges.
Regulation 16 & 17:
Related-party transactions must be monitored to ensure they align with independent director oversight and governance policies.
3. Corporate Governance Requirements
A. Board and Committee Oversight
All RPTs must be reviewed and approved by the Audit Committee, comprising independent directors.
Independent directors must evaluate:
Fairness of the transaction
Arm’s-length terms
Potential conflict of interest
B. Shareholder Approval
Material RPTs require prior shareholder approval, ensuring minority shareholder protection.
Disclosure in the Notice of AGM is mandatory, with details of the related party and transaction value.
C. Disclosure and Reporting
Annual report must include:
List of RPTs
Nature and amount of each transaction
Policies for approval and monitoring
Stock exchange filings required for listed companies.
D. Transparency and Documentation
Maintain detailed board and committee meeting minutes documenting rationale, approvals, and risk assessment.
Ensure audit trail for internal and external audits.
E. Conflict of Interest Management
Related parties should not participate in discussions or voting on transactions concerning themselves.
Independent directors must certify arm’s-length pricing and fairness.
F. Continuous Monitoring
Audit committees should periodically review ongoing RPTs to ensure compliance with agreements and regulatory requirements.
Material deviations must be reported to shareholders and regulators.
4. Illustrative Case Laws
1. Sahara India Real Estate Corp. Ltd. v. SEBI (2012)
Facts: Sahara’s transactions with group entities lacked transparency.
Issue: Whether RPTs were properly disclosed and monitored.
Holding: Court emphasized that boards and audit committees must ensure RPTs are disclosed and approved in compliance with governance standards.
Principle: Transparency and approval processes are critical in RPTs.
2. Satyam Computers Ltd. (2009)
Facts: Several RPTs with promoter-related companies were undisclosed and non-arm’s-length.
Issue: Liability of board and audit committee in approving RPTs.
Holding: Court held directors liable for failing to review and approve related-party dealings.
Principle: Independent oversight and fair evaluation are mandatory for governance.
3. ICICI Bank v. Board of Directors (2018)
Facts: Alleged RPTs were approved without audit committee scrutiny.
Issue: Governance compliance under Companies Act and SEBI regulations.
Holding: Court reinforced that audit committee review is mandatory for all RPTs.
Principle: Audit committee is the primary oversight mechanism for related-party governance.
4. Infosys Ltd. v. SEBI (2012)
Facts: Executive remuneration to key managerial personnel exceeded approved limits.
Issue: Approval and disclosure of material RPTs, including managerial remuneration.
Holding: SEBI directed enhanced disclosure of RPTs in annual reports and filings.
Principle: RPT governance includes all transactions, including compensation and perquisites.
5. Tata Sons Ltd. v. Union of India (2010)
Facts: Related-party leasing transactions questioned by minority shareholders.
Issue: Fiduciary duty of directors in approving RPTs.
Holding: Courts reaffirmed that directors must act in good faith and protect minority shareholder interests.
Principle: Fairness and arm’s-length pricing are core governance requirements.
6. Reliance Industries Ltd. v. SEBI (2015)
Facts: Delayed disclosure of material RPTs raised regulatory concerns.
Issue: Compliance with SEBI LODR Regulation 23.
Holding: Boards and KMPs held responsible for timely reporting and approval of material RPTs.
Principle: Continuous monitoring and disclosure are integral to corporate governance.
5. Practical Governance Takeaways
Implement Clear Policies – Document criteria for approval, review, and reporting of RPTs.
Audit Committee Oversight – Independent directors must review and approve all material transactions.
Shareholder Approval for Material Transactions – Ensure compliance with thresholds and disclosure requirements.
Maintain Transparency – Disclose all RPTs in annual reports and stock exchange filings.
Conflict Management – Related parties should abstain from decision-making affecting themselves.
Periodic Monitoring – Continuously track RPTs for compliance, arm’s-length terms, and regulatory adherence.
Summary: Related-party transactions are inherently sensitive and carry risks of misuse or oppression. Indian corporate governance frameworks under the Companies Act 2013 and SEBI LODR Regulations mandate audit committee oversight, shareholder approval, disclosure, and monitoring. Case law confirms that directors and KMPs are personally accountable for failing to comply with governance requirements, highlighting the importance of transparency, fairness, and arm’s-length terms.
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