Related-party transaction

Indian Economy glossary

Also called: RPT · Topic: Industrial Policy, Public Sector, MSMEs and Disinvestment · NCERT: Beyond NCERT

Meaning

A related-party transaction (RPT) is a deal between a company and people or firms connected to it, such as its directors, promoters, their relatives or group firms. Because the people on both sides are linked, the price or terms may not be fair to the company.

RPTs matter most in India because they are the main channel for tunnelling, where promoters move value out of a listed company. Indian company law therefore requires special approval and disclosure for these deals.

Explanation

How an RPT becomes a problem

  • Many RPTs are normal business. A group firm may supply parts, rent out an office or give a loan.
  • The risk comes from who controls the board. In India, most big firms are promoter-dominated (the founder family or group holds a controlling stake and runs the board).
  • Tunnelling (majority owners moving value out of the listed company into firms they own privately) often happens through RPTs:
  • The listed firm buys raw material from the promoter's private firm at 20% above the market price.
  • The extra money goes to the promoter's private firm.

  • The listed firm's profit falls, so minority shareholders (small investors who do not control the company) lose.

  • So an RPT is not illegal in itself. It is a conflict of interest that the law has to check.

The approval ladder

  • Step 1: audit committee. Under s. 188 of the Companies Act 2013 and LODR Reg. 23, every RPT needs audit-committee approval, and only independent directors vote.
  • Independent director = a non-executive director with no material financial or family ties to the company or its promoters.

  • LODR = SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Every listed company must follow these rules.

  • Step 2: shareholders, for material RPTs. A material RPT (one above a set size) also needs shareholder approval.

  • Related parties cannot vote on these deals.

  • So the minority shareholders decide.

  • Disclosure: SEBI sets the minimum information that must go to the audit committee and shareholders before they approve an RPT (Industry Standards, circulars of 2025) [2].

  • Small-deal exemption: under the RPT Industry Standards, RPTs up to Rs 1 crore stay exempt from these disclosure standards [1].

The "material" test: old rule vs scale-based proposal

  • Current test: an RPT is material if it is above Rs 1,000 cr or 10% of annual consolidated turnover, whichever is lower.
  • Scale-based proposal (SEBI, Sep 2025): a slab percentage of turnover, with an upper ceiling of Rs 5,000 cr to protect minority shareholders [1].
  • SEBI's own example: threshold = 10% of the first Rs 20,000 cr of turnover + 5% of the remaining turnover [1].

  • Check the final slabs in the latest LODR text.

  • Worked example (consolidated turnover = Rs 30,000 cr):

Rule Calculation Material threshold
Old rule Lower of Rs 1,000 cr or 10% × 30,000 = 3,000 Rs 1,000 cr
Scale-based 10% × 20,000 + 5% × 10,000 = 2,000 + 500 Rs 2,500 cr
  • What this means:
  • A higher threshold means fewer deals count as material.
  • So large firms need shareholder votes less often.
  • The Rs 5,000 cr cap stops the limit from rising without end for very large firms.

In India

  • Law: the Companies Act 2013 first put RPT rules into law (s. 188). The SEBI LODR Regulations, 2015 (Reg. 23) add stricter rules for listed firms.
  • Regulator: SEBI sets the material-RPT threshold and the disclosure standards for listed companies.
  • How India got here:
  • 1999 → 2000: the Kumar Mangalam Birla Committee led to Clause 49 of the listing agreement, the first formal governance code for listed firms.
  • 2015: LODR replaced the listing agreement with binding regulations.

  • 2017: the Kotak Committee pushed deeper governance reforms.

  • Why it stays in the news:

  • Big governance failures such as Satyam (2009) and IL&FS (2018) showed that boards and auditors can fail.

  • The Adani-Hindenburg episode (2023) put beneficial ownership in focus. Hidden owners can hide RPTs.

  • Latest step: SEBI's Sep 2025 board memo proposed the scale-based material threshold with a Rs 5,000 cr ceiling [1]. Its Oct 2025 circular set the minimum information to be given before RPT approval [2].

Don't confuse with

  • Tunnelling: tunnelling is the abuse, where promoters take value away from minority shareholders. An RPT is the channel that tunnelling often uses. Many RPTs are fair and lawful.
  • Beneficial ownership: this is about who really owns a firm (the Significant Beneficial Owner threshold is 10%, s. 90, 2018). An RPT is about a deal with a connected party. They are linked because hidden owners can hide RPTs.
  • Material vs non-material RPT: every RPT needs audit-committee approval, with only independent directors voting. Only material RPTs also need a shareholder vote, where related parties cannot vote.
  • Western agency problem: in the US and UK the conflict is managers vs dispersed owners (high pay, empire-building). The Indian RPT problem is majority (promoter) vs minority shareholders.

Prelims Hooks

  • RPTs are governed by s. 188, Companies Act 2013 and Reg. 23, SEBI LODR Regulations 2015. The rule comes from the Companies Act, not the RBI Act.
  • Only independent directors on the audit committee vote to approve an RPT.
  • For material RPTs, shareholders must approve and related parties cannot vote, so minority shareholders decide.
  • Current material test: the lower of Rs 1,000 cr or 10% of annual consolidated turnover.
  • SEBI's scale-based proposal (Sep 2025): 10% of the first Rs 20,000 cr of turnover + 5% of the rest, capped at Rs 5,000 cr [1]. RPTs up to Rs 1 crore stay exempt under the RPT Industry Standards [1].
  • Trap: "Tunnelling is a manager vs owner problem." This is wrong. It is a promoter (majority) vs minority shareholder problem, and RPTs are its main channel.

Mains Points

  • Ease of doing business vs investor protection: the scale-based threshold [1] cuts compliance costs, because large firms face fewer shareholder votes.
  • Example: for a firm with Rs 30,000 cr turnover, the threshold rises from Rs 1,000 cr to Rs 2,500 cr.
  • More deals then skip the minority vote, so protection may weaken.
  • The Rs 5,000 cr ceiling and the stronger disclosure rules [2] partly balance this.

  • This links to the credibility of India's capital markets after Hindenburg (2023).

  • Rules that fit Indian ownership: India borrowed Anglo-Saxon tools such as independent directors and audit committees. But promoters in effect choose the independent directors, so their oversight of RPTs can be weak.

  • Stronger safeguards include majority-of-minority voting on RPTs, beneficial-ownership transparency and institutional investor activism (proxy advisers such as IiAS, InGovern and SES).

  • RPTs and group-level risk: in business groups, RPTs link many firms, so money and risk can move between them quietly. IL&FS (2018) showed how a group-level governance failure can shock credit markets. Watching RPTs closely helps financial stability as well as corporate governance.

Related concepts

Read more

Sources

  1. 1SEBI Board memorandum (Sep 2025) — Amendment to SEBI (LODR) Regulations: scale-based material RPT thresholdsebi.gov.in · tier 1
  2. 2SEBI circular (Oct 2025) — Minimum information to be provided to the Audit Committee and Shareholders for approval of RPTssebi.gov.in · tier 1