SEBI’s New Guidelines for Related Party Transactions: Key Takeaways

In a bid to tighten corporate governance and improve transparency in business dealings, the Securities and Exchange Board of India (SEBI) has significantly revamped the framework governing Related Party Transactions (RPTs). These revisions are a part of SEBI’s ongoing efforts to align Indian regulations with global best practices and to safeguard the interests of minority shareholders.

Why Related Party Transactions Matter

Related Party Transactions refer to arrangements between a company and its related entities - such as promoters, group companies, or key managerial personnel - which might pose a conflict of interest. While such transactions can be legitimate and even strategic, they must be disclosed and regulated to avoid misuse of shareholder funds and insider influence.

What Has Changed?

SEBI notified key amendments to the Listing Obligations and Disclosure Requirements (LODR) Regulations in 2021 and 2022, with staggered implementation timelines. These changes have redefined what constitutes a related party, broadened the scope of RPTs, and tightened the approval mechanisms.

Let’s break it down:

1. Expanded Definition of Related Parties : Previously, the definition was limited largely to promoters and key management personnel.

The revised rules now include:

• All persons or entities forming part of the promoter/promoter group, regardless of their shareholding
• Any person or entity holding equity shares of 20% or more (lowered to 10% from April 1, 2023)

This expanded net brings more entities under regulatory scrutiny.

2. Wider Scope of RPTs

SEBI now mandates disclosure and approval not just for transactions with related parties but also for those “for the benefit of” related parties. This means even if a transaction is with a third party, it will be considered an RPT if it indirectly benefits a related party.

This is a significant shift—one that aims to close loopholes in the earlier definition.

3. Stricter Approval Mechanisms

• All material RPTs must now be approved only by shareholders, excluding related parties from voting.
• The threshold for a “material” RPT has been lowered. Any transaction exceeding ₹1,000 crore or 10% of the company’s consolidated annual turnover (whichever is lower) will now be considered material.
• Audit committees are required to pre-approve all RPTs and review existing ones periodically.

These changes aim to eliminate any undue influence by interested parties and ensure that
decisions are taken in the best interest of the company and its shareholders.

4. Enhanced Disclosure Requirements

• Listed companies must submit a half-yearly RPT disclosure in a prescribed format to the stock exchanges.
• These disclosures must also be published on the company’s website, ensuring greater public accountability.
• SEBI has also introduced detailed templates to standardize disclosures and improve comparability across companies.

Conclusion

Companies now need to invest in stronger internal controls, real-time compliance monitoring, and robust documentation to meet SEBI’s revised requirements. SEBI’s revised RPT framework is more than a compliance update - it’s a move towards more ethical corporate conduct. By making RPTs more transparent and subject to stricter scrutiny, the regulator is pushing companies to act with integrity and fairness. For investors, this means increased confidence and protection. For companies, it’s an opportunity to strengthen their governance and build long-term trust with stakeholders.

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