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13 Aug 2025

Loophole-in-RPT-definition

Loophole-in-RPT-definition

Loophole in RPT definition???

Scenario 1:

Let us assume A ltd and B ltd are 2 Listed Companies, where A ltd is Promoter of B ltd having less than 10% share capital. Now there is a transaction (Sale of Goods) from A ltd to B ltd. Here B ltd needs to get approval for Related Party Transaction from Audit Committee /Board /Shareholders based on limits prescribed under that Act. Whereas A ltd being a promoter to B ltd doesn’t need to get any approval for the sale.

Let’s see how.?

2 (zb) OF SEBI LODR REGULATIONS 2015

2 (76) of Companies Act,2013

 “related party” means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards:

[Provided that: 

(a) any person or entity forming a part of the promoter or promoter group of the listed entity; or 

(b) any person or any entity, holding equity shares:

(i) of twenty per cent or more; 

Or

(ii) of ten per cent or more, with effect from April 1, 2023;

in the listed entity either directly or on a beneficial interest basis as provided under section 89  of the Companies  Act,  2013,  at  any  time,  during  the immediate preceding financial year;

shall be deemed to be a related party:]

 

"related party", with reference to a company, means— 

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager 1[or his relative] is a member or director;

(v) a public company in which a director or manager is a director 2[and holds] along with his relatives, more than two per cent of its paid-up share capital;

(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;

*****31[(viii) any body corporate which is—

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary; or

(C) an investing company or the venturer of the company;";

When we analyse both these definitions, we can see that according to Companies Act,2013, a promote is not even a related party. Further in SEBI LODR, any person forming part of promote or promoter group is a Related Party.

Hence when we look at our example, A ltd being promoter of B ltd is a related party to B ltd, whereas the vice versa is not applicable, i.e., B ltd is not Related Party to A ltd. Hence the approval from Board/Committee/Shareholders is only from B ltd and no approval is required from A ltd, even though it being a listed entity and a promoter to B ltd. 

Scenario 2:

Let’s assume A ltd is a listed entity and B ltd is an unlisted public where A ltd is a promoter holding less than 20% shares. Here for all kinds of transactions both the companies need not require any approval, why? Because B ltd only needs to follow companies act, where promoter is not a related party and as per LODR or Companies Act, if you are promoter to a company, that company is not a related party to you.

Conclusion:

This may or may not be a loophole based on the situation or transaction basis. But what I would like to suggest are these:

  1. Promoter should be brought to the ambit of related party definition under the Companies Act,2013.
  2. A Company where a person is promoter to, must be related party to that person. 

What do you suggest???

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From the Desk of CS SHARATH