Related Party Transactions Regulation And Approval Norms.
I. Concept and Rationale of Related Party Transactions (RPTs)
A Related Party Transaction is any transaction between a company and a person or entity that has a relationship capable of influencing decision-making.
RPT regulation exists to prevent:
Conflict of interest
Tunnelling of corporate resources
Oppression of minority shareholders
Governance failures
Indian law treats RPTs as presumptively sensitive, requiring enhanced approvals and disclosures.
II. Statutory and Regulatory Framework
1. Companies Act, 2013
Section 2(76) – Definition of “related party”
Section 188 – Approval and disclosure of RPTs
Section 177 – Audit Committee approval
Section 184 – Disclosure of interest by directors
Section 189 – Register of contracts and arrangements
2. SEBI (LODR) Regulations, 2015 (for listed companies)
Regulation 2(1)(zb) – Definition of RPT
Regulation 23 – Comprehensive RPT governance framework
SEBI LODR is stricter than the Companies Act and prevails for listed entities.
III. What Constitutes a Related Party Transaction
A. Related Parties
Includes:
Directors and KMPs
Relatives of directors and KMPs
Promoters and promoter group entities
Subsidiaries, associates, joint ventures
Entities with significant influence or control
B. Covered Transactions
Sale or purchase of goods or services
Leasing of property
Transfer of resources, obligations, or services
Appointment of agents
Brand usage and royalty arrangements
Loans, guarantees, and securities
IV. Approval Mechanism for RPTs
1. Audit Committee Approval
Mandatory prior approval
Only Independent Directors vote
Omnibus approval permitted subject to conditions
2. Board Approval
Interested directors must abstain
Disclosure of interest mandatory
3. Shareholders’ Approval
Required when:
Transactions exceed prescribed thresholds
Transaction is “material” under SEBI LODR
Key Rule:
Related parties cannot vote to approve their own transactions (for listed entities).
V. Arm’s Length and Ordinary Course of Business
RPTs are exempt from shareholder approval if:
Conducted at arm’s length
In the ordinary course of business
However:
Burden of proof lies on the company
Regulators scrutinise substance over form
VI. Disclosure and Documentation Requirements
Disclosure in Board’s Report
Disclosure in financial statements
Corporate governance disclosures under SEBI
Maintenance of Register under Section 189
VII. Consequences of Non-Compliance
Transactions may be voidable
Directors liable to indemnify losses
Monetary penalties
Regulatory sanctions by SEBI
Oppression and mismanagement proceedings
VIII. Key Case Laws on Related Party Transactions
1. Dale & Carrington Invt. (P) Ltd. v. P.K. Prathapan
Issue:
Use of board powers to allot shares benefiting promoters.
Held:
Directors are fiduciaries
RPTs must serve company’s interest, not personal control
Significance:
Landmark on fiduciary abuse via RPTs.
2. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.
Issue:
Preferential treatment to related entities.
Held:
Even legally compliant RPTs can be struck down if unfair
Fairness test applies in addition to legality
Significance:
Introduces equitable scrutiny of RPTs.
3. S. Varadarajan v. Venkateswara Solvent Extraction (P) Ltd.
Issue:
Validity of contracts with related entities.
Held:
Disclosure and approval are mandatory
Non-disclosure vitiates transaction
Significance:
Emphasises transparency in RPTs.
4. Vodafone International Holdings BV v. Union of India (Governance Context)
Issue:
Substance of transactions over form.
Held:
Corporate arrangements scrutinised for real intent
Colourable transactions can be disregarded
Relevance:
Applied in RPT scrutiny to detect sham arrangements.
5. Re: Eveready Industries India Ltd.
Issue:
Shareholder approval and voting by related parties.
Held:
Related parties cannot influence approval
Minority protection central to RPT governance
Significance:
Affirms SEBI’s non-voting rule.
6. LIC v. Escorts Ltd.
Issue:
Disclosure of controlling interests and related dealings.
Held:
Transparency in corporate dealings essential
Shareholders entitled to know RPT structures
Significance:
Foundational governance precedent.
7. Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd.
Issue:
Judicial review of board decisions involving group entities.
Held:
Courts respect business judgment
Interference only where mala fides or oppression shown
Significance:
Sets review threshold for RPT disputes.
IX. RPTs and Minority Shareholder Protection
RPT regulation is closely linked to:
Oppression and mismanagement remedies
Class action suits
Fiduciary duty enforcement
Courts apply:
Fairness test
Proper purpose doctrine
Burden of proof on controllers
X. Best Practices for RPT Compliance
Centralised RPT identification system
Independent valuation and benchmarking
Detailed Audit Committee review notes
Periodic RPT audits
Transparent disclosures beyond minimum requirements
XI. Conclusion
Related Party Transactions represent the highest conflict-of-interest risk area in corporate governance. Indian law and jurisprudence consistently affirm that:
RPTs are permissible, but only when they are transparent, fair, and demonstrably in the company’s interest.
Robust approval mechanisms, independent oversight, and meaningful disclosures are essential to prevent regulatory action and shareholder disputes.
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