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Related-Party-Transactions
Related Party Transactions (RPT) - Compliance Framework under Companies Act, 2023 & SEBI LODR Regulations
| Aspect | Companies Act, 2023 | SEBI (LODR) Regulations, 2015 |
|---|---|---|
| Definition of Related Party (RP) | Defined under Section 2(76): - Directors/their relatives - Key Managerial Personnel (KMP)/their relatives - Firms with directors/KMPs/relatives as partners - Public companies where director/manager and relatives hold >2% |
Expanded under Regulation 2(zb): - As per applicable accounting standards - Promoter/promoter group - Shareholders holding: ? ?20% equity (earlier) ? ?10% equity (from April 1, 2023), directly or indirectly |
| Definition of RPT | Not explicitly defined, but includes transactions such as: - Sale/purchase/supply of goods/materials - Availing/rendering of services - Underwriting of securities [Section 188] |
Defined in Regulation 2(zc) as: - Transfer of resources, services, obligations - Between listed entity/subsidiary and RPs - Or with other entities benefiting an RP - Irrespective of whether price is charged |
| Board Approval | Mandatory for all RPTs Rule 15 of Companies (Meetings of Board & its Powers) Rules, 2014 |
Not specifically mandated in LODR but board policy must exist on materiality and RPTs |
| Voting Restrictions | Related party member can’t vote on resolution approving RPT [Section 188(1), second proviso] | Same voting restriction applies for shareholders' approval under Regulation 23(4) |
| Audit Committee Approval | Not mandatory under Companies Act unless required by board | Mandatory for all RPTs [Regulation 23(2)] Audit committee must approve prior to transaction |
| Policy on RPTs | No specific requirement | Mandatory under Regulation 23(1): - Define “materiality” - Set thresholds - Disclose and deal with RPTs |
| Material RPTs – Thresholds | Not specifically defined | Material RPT = ? ?10% of annual consolidated turnover [Regulation 23(1)] ? ?5% of turnover if involving brand usage/royalty [Regulation 23(1A)] |
| Shareholders’ Approval | Required if crossing prescribed thresholds under Section 188(1) | Required for all material RPTs [Regulation 23(4)] |
| Annual Disclosure Requirements | Directors’ report must disclose RPTs | Schedule V requires: - All RPT details - Policy on RPTs - Rationale - Market price comparison |
| Exemptions from RPT Approvals | Few exemptions for ordinary course and arm’s length | Exemptions under Regulation 23(5): - Transactions between two govt. companies - Holding & wholly owned subsidiary (consolidated accounts presented) |
| New SEBI Circular & Guidance Note | Not applicable under Act | SEBI Circular No. SEBI/HO/CFD/CMD1/CIR/P/2021/662 + Guidance Note dated Feb 14, 2025 (effective from Apr 1, 2025): • Minimum disclosures to audit committee/shareholders • Standard format for balance sheet and P&L disclosures • Improved transparency and diligence before RPT approval |
| Challenges in Implementation | N/A | Practical concerns: • Limited audit committee meetings (usually 4–6/year) • Audit committee = only independent directors • Independent directors serve on multiple boards ? Time constraints |
| SEBI Guidance Note – Key Additions | N/A | • Disclosures must be in standard formats • More granular information required • Higher diligence expectation from audit committee • Applies from April 1, 2025 |
Conclusion
While the regulatory framework has become more robust to prevent abuse via related party transactions, practical hurdles such as limited audit committee availability and voluminous disclosure obligations may slow down approvals. SEBI’s new Guidance Note enhances oversight but may also introduce compliance burden on companies and independent directors.
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