SEBI’s New Disclosure Norms for Related Party Transactions: Redefining Corporate Governance in Listed Companies

Introduction

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‍Related Party Transactions (“RPTs”) have long been a contentious aspect of corporate governance, given their potential to create conflict of interest, leading to financial mismanagement and promoter-driven gains.

This principle is clearly articulated under Section 188 of the Companies Act, 2013^[1], which defines an arm’s length transaction as a “transaction between transaction between two related parties that is conducted as if they were unrelated so thatthere is no conflict of interest.”

Several high-profile cases have underscored the risks and triggered demand for stronger disclosures. These include the diversion of funds by a major business group, resulting in an INR25 crore SEBI penalty and a five-year market ban on its industrialist-chairman^[2]and the collapse of a leading housing finance company after an INR 31,000crore fraud involving shell entities^[3]. These cases demonstrated the dangers of opaque RPTs, ranging from misleading financial disclosures to erosion of internal checks and balances.

Until recently, RPT disclosures were ambiguous and selective in nature. This created an information asymmetry thatleft audit committees and shareholders without a standardized framework to evaluate such transactions.

Disclosure Norms for Related Party Transactions

In a significant step towards promoting uniformity and transparency, the Securities and Exchange Board of India (“SEBI”), along with the Industry Standards Forum (“ISF”), released new standards on February 14, 2025, titled “Minimum Information to be provided for Review of the Audit Committee and Shareholders for Approval of Related Party Transaction (RPT)”)”^[4].These standards are mandatory for all listed entities.^[5]

Salient Features of the New Disclosure Framework: Implications for Listed Entities

(a)           Audit Committee Review

Listed entities will now be required to furnish comprehensive and standardized information to the audit committee when seeking approval for any RPT. The revised Section III-B of SEBI’s master circular dated November 11, 2024, mandates adherence to the ISF disclosure format for audit committee reviews.

(b)           Shareholder Approval

In cases where shareholder approval is required (i.e., material RPTs as under regulation 23(4)of SEBI (Listing Obligations and Disclosure Requirements), 2015), the notice sent to the shareholders needs to include standardized information as per the revised requirements to ensure uniformity in disclosures. The revised Part B of Section III-B of the Master Circular ensures that shareholders are equipped with all relevant financial and governance data to make informed decisions.

(c)           Key Compliance Requirements^[6]

(i)            Promoters,directors and key managerial personnel will now be required to certify that RPTs are not prejudicial to public shareholders.

(ii)           Companies willnow be required to justify how a specific RPT is in the best interest of the company and its shareholders.

(iii)         Audit committees will have to review the terms and conditions of bids received from unrelated parties. If no such bids were invited, the disclosure will include the reasonsfor not inviting such bids.

(iv)         Companies will now be required to compare royalty payments with at least three industry peers to ensure fairness.

(v)           Royalty payments must now be disaggregated into distinct categories like brand usage, technology transfer, and management fees.

(d)           SEBI’s RPT Analysis Portal^[7]

SEBI also introduced the RPT Analysis Portal to support the effective implementation of the enhanced disclosure framework. Developed in collaboration with three proxy advisory firms, the portal serves as a centralized digital infrastructure to improve transparency and standardization of disclosures made in relation to RPTs.

This portal allows all investors, both retail and institutional, to access crucial information on RPTs directly. The following are the key features of the portal:

(i)            Standardized and centralized repository of RPT disclosures across all listed entities.

(ii)          Tools for benchmarking and comparing governance practices and regulatory compliance.

(iii)         Enhanced transparency to support informed investor decisions and strengthen accountability.

The new disclosure framework introduce senhanced compliance obligations, requiring rigorous internal checks and structured due diligence.

Non-compliance may lead to regulatory scrutiny, penalties, and potential legal consequences, particularly if minority shareholder rights are infringed, or fiduciary duties are breached.

Analysis: Oversight vs Practicality

While the reforms significantly raisethe bar for transparency around RPTs, practical implementation challengesremain. Most audit committees meet only four to six times a year, primarily toapprove quarterly financial results, leaving limited time for in-depth scrutinyof voluminous RPT documentation. Independent directors, often serving onmultiple boards, face scheduling conflicts and tend to rely heavily onmanagement certifications.

Further, SEBI has not provided clear guidance on determining “arm’s length price”, leaving audit committees without regulatory benchmarks for this critical assessment. Historically, regulatory frameworks did not distinguish between routine RPTs and high-value strategic RPTs, resulting in either disproportionate scrutiny and excessive focus on low-risk transactions or insufficient attention to high-risk matters. The ISF framework addresses some of these gaps by emphasizing materiality and requiring justification. Effective implementation will depend on whether boards and audit committees have the time, tools, and expertise to meet these enhancedexpectations.

While SEBI had initially mandated that the new disclosure requirements for RPTs would take effect from April 1, 2025,it later extended the effective date to July 1, 2025^[8].

Conclusion

While SEBI’s enhanced RPT framework isa commendable step towards investor protection and governance reform, itssuccess hinges on effective implementation. SEBI could mandate materiality thresholds to ensure audit committees focus on transactions with significantshareholder impact. For minority investors, investor education and greater awareness of tools like the RPT Analysis Portal are critical. SEBI may considerissuing binding guidance on determining arm’s length pricing, includingvaluation methodologies and documentation standards. To improve board-leveloversight, periodic training for independent directors and greater integrationwith the RPT Analysis Portal could prove beneficial.

References

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[1] Section 188, Companies Act, 2013.

[2] RHFL fraud: Why has SEBI fined Anil Ambani and banned him from the market - https://indianexpress.com/article/explained/explained-economics/rhfl-fraud-why-has-sebi-fined-anil-ambani-and-banned-him-from-the-market-9533010/

[3] News portal alleges Rs. 31,000crore fraud by home finance company DHFL - https://timesofindia.indiatimes.com/india/news-portal-alleges-rs-31000-crore-fraud-by-home-finance-company-dhfl/articleshow/67748033.cms

[4] Industry Standards on “Minimum information to be provided for review of the audit committee and shareholders for approval of a related party transaction” - https://www.sebi.gov.in/legal/circulars/feb-2025/industry-standards-on-minimum-information-to-be-provided-for-review-of-the-audit-committee-and-shareholders-for-approval-of-a-related-party-transaction_91945.html

[5] Regulations 23(2), 23(3), and 23(4)of the SEBI (Listing Obligations and Disclosure Requirements)

Regulations, 2015.

[6] Section III – B: Disclosure and other obligations of listed entities in relation to Related Party Transactions read with Annexure 13 of the SEBI Master Circular dated November 11, 2024.

[7] RPT analysis: India’s 1st RPT analysis portal - https://rptanalysis.com/.

[8] Industry Standards on “Minimum information to be provided for review of the audit committee and shareholdersfor approval of a related party transaction” - https://www.sebi.gov.in/legal/circulars/mar-2025/industry-standards-on-minimum-information-to-be-provided-for-review-of-the-audit-committee-and-shareholders-for-approval-of-a-related-party-transaction-_92843.html.