Paradigm shift in disclosure standards for RPTs: Of close ties, closer scrutiny

1. INTRODUCTION

Related party transactions (“RPTs”), while legitimate, carry a heightened risk of conflict of interest. To ensure transparency and to protect the interest of stakeholders, securities regulators around the world, including the Securities and Exchange Board of India (“SEBI”) have laid down specific disclosure and approval requirements for undertaking RPTs by listed entities. In India, the regulatory framework governing RPTs by listed entities primarily comprises of: (i) the Companies Act, 2013 (“Companies Act”); (ii) the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”); and (iii) the Master Circular for Compliance with the Provisions of the SEBI LODR by Listed Entities, dated November 11, 2024[1] (“Master Circular”), which consolidates applicable SEBI circulars, including those pertaining to RPT disclosures and approvals.

On February 14, 2025, SEBI introduced amendments to the Master Circular by way of a circular (“2025 RPT Circular”).[2] The 2025 RPT Circular requires listed entities to comply with the industry standards on ‘Minimum information to be provided for Review of the Audit Committee and Shareholders for Approval of Related Party Transaction’ (“Industry Standards”)[3], for undertaking an RPT. The Industry Standards were formulated by the Industry Standards Forum (a forum of ASSOCHAM, CII and FICCI) in consultation with SEBI.[4] With the aim of facilitating informed decision making, the Industry Standards have significantly revamped the minimum information to be disclosed by the management before the audit committee and the shareholders.

The Industry Standards have been introduced as a natural extension to the recent amendments[5] to the SEBI LODR in relation to RPTs, reflecting a consistent regulatory intent to strengthen the framework governing RPTs. This article summarizes and analyzes the key changes introduced by the 2025 RPT Circular for listed entities.

2. OVERVIEW OF THE INDUSTRY STANDARDS

2.1. Background

For listed entities to undertake an RPT, the Companies Act and the SEBI LODR mandate approvals at two levels – first, by the audit committee[6], and second, in case of a ‘material’ RPT, by the shareholders.[7] Under Regulation 23(1) of the SEBI LODR, an RPT is deemed material if the transaction individually or taken together with previous transaction(s) during a financial year exceeds the lower of: (i) INR 1,000 crores; or (ii) 10% of the annual consolidated turnover of the listed entity under the last audited financials.[8] Further, each listed entity is required to formulate a materiality policy[9], approved by its board of directors, setting out, among other things, the threshold for an RPT to be considered ‘material’ (subject to thresholds provided under the SEBI LODR), what constitutes ‘material modifications’, criteria for obtaining omnibus approvals, etc.

Previously, to obtain approvals for an RPT, listed entities were required to disclose limited information before the audit committee and the shareholders (as applicable) pursuant to the provisions set out in circular dated November 22, 2021 (“Original RPT Circular”)[10]. Now, SEBI by way of issuance of the 2025 RPT Circular, has made an extensive and comprehensive regime applicable to listed entities as set out in the Industry Standards.

2.2. Legal Effect of the Industry Standards

The 2025 RPT Circular makes the Industry Standards binding, and accordingly, any violation of the Industry Standards will be a violation of the provisions of the SEBI Act, 1992. However, if the Industry Standards become inconsistent with subsequent changes in the SEBI LODR and/or the Master Circular, the provisions of the SEBI LODR and/or the Master Circular, as the case maybe, will prevail.

2.3. What do the Industry Standards provide?

The Industry Standards prescribe a uniform and exhaustive set of disclosures to be furnished by listed entities to their audit committees and shareholders for the purpose of seeking approval for consummation of RPTs. It is imperative to highlight that the Industry Standards do not alter the process for obtaining approvals, but only the information to be furnished to the audit committee and the shareholders[11] for obtaining such approvals.

(a). Applicability

1. Effective Date

The 2025 RPT Circular originally intended to come into effect on April 01, 2025. However, in view of large-scale implementation changes, SEBI has delayed the application of the Industry Standards, which shall now be effective as of July 01, 2025.[12]

2. Clarifications by the Industry Standards Forum[13]

The Industry Standards shall apply to all RPTs where approval or ratification is to be obtained on or after July 01, 2025 (irrespective of the effective date of such RPTs). However, if the approval for an RPT had been granted by the audit committee and the shareholders prior to July 01, 2025 (even if the effective date of such RPTs is on or after July 01, 2025), the Industry Standards shall not apply.[14] If a material modification to an RPT which was approved prior to July 01, 2025 is being proposed, the Industry Standards will apply at the time of obtaining approval of the audit committee and shareholders (if applicable) for such modification.[15] In cases where audit committee approval had been obtained prior to July 01, 2025, but notice for shareholders meeting was either sent before July 01, 2025 or is sent on July 01, 2025 or after July 01, 2025, the Industry Standards will not apply for obtaining shareholder approval[16].

3. Types of RPTs and applicable disclosure requirements

The Industry Standards have classified RPTs under three categories based on various parameters and have outlined the disclosures to be made under each such category. The Industry Standards are applicable to: (i) material RPTs[17]; (ii) RPTs with ‘Promoter’ or ‘Promoter Group’ or persons with whom the ‘Promoter’ or ‘Promoter Group’ has a concern or interest[18] exceeding or not exceeding the Specified Thresholds[19]; or (iii) residual RPTs.

Provided below is a list of the various classifications and the applicable disclosure requirements[20]:

(b). Levels of Disclosures

The Industry Standards set out a tiered framework for disclosures:

(c). ‘Balance sheet’ item and a ‘profit & loss’ item

As noted at para 2.3(a), RPTs have been classified based on, among other things, whether they relate to balance sheet items or profit & loss items. This classification is critical, as it influences the nature of disclosures and the approval requirement.

1. Balance sheet items[24] are those transactions that typically impact the asset or liability position of a company rather than its revenue or expenses. In the context of RPTs, the Industry Standards set out the following list of illustrative categories which will be considered as balance sheet items:

• Loans, advances, or inter-corporate deposits extended by or to a related party;
• Investments made in or received from a related party;
• Guarantees (excluding performance guarantee), indemnities, comfort letters, or sureties issued on behalf of a related party;
• Borrowings undertaken from a related party; and
• Sale, lease, or disposal of assets of subsidiary, or of unit, division or undertaking of the listed entity, or disposal of shares of subsidiary or associate.

2. Profit & loss items[25] refer to transactions that impact the revenue and expenditure of a company and are typically reflected in the statement of profit and loss. The examples set out in the Industry Standards include:

• Sale, purchase, or supply of goods and services to or from a related party; and
• Payment of royalty.

(d). Disclosures to the Audit Committee[26]

For all RPTs requiring audit committee approval, the management must provide, among other things:

1. All disclosures mandated under Para 4 of the Industry Standards;
2. A certificate from the CEO/CFO/other KMPs, and each promoter-director certifying that the RPT is not prejudicial to public shareholders and that its terms are no less favourable than those available from unrelated parties;
3. Valuation or fairness reports, where available; and
4. Audited financial statements of the related party[27], if applicable.

(e). Disclosures to Shareholders [28]

Where shareholder approval is required, under the explanatory statement contained in the notice to the shareholders, the following information, among other things, must be disclosed:

1. All information placed before the audit committee under Para 4 of the Industry Standards (with redaction allowed only for commercially sensitive information, subject to certification and approval from the audit committee) along with comments of the audit committee;
2.  Justification as to why the proposed RPT is in the interest of the listed entity;
3. Audit committee’s confirmation (along with statement of assessment) that the promoter(s) will not benefit at the expense of public shareholders;
4. Copy of valuation report or other reports (if any) considered by the audit committee; and
5. Summary of bids from unrelated parties or explanation for absence thereof.[29]

3. ANALYSIS

Whilst RPTs constitute a key component of corporate operations in India, the very nature of such transactions makes them susceptible to misuse. Despite successive amendments aimed at strengthening India’s RPT framework, recurring instances of opacity and abuse such as diversion of funds from listed entities to shareholders, continue to surface. The changes introduced by the 2025 RPT Circular mark a crucial step by SEBI towards countering misuse of RPTs and addressing issues relating to non-disclosure of essential information before obtaining approvals from the audit committee and the shareholders. The movement from narrative-based disclosures to a structured, uniform format is an important pivot towards ensuring that audit committees and shareholders are adequately equipped with material and comparable information to arrive at an informed decision.

On the contrary, for listed entities, especially those with diverse business verticals or multiple subsidiaries, the new framework is undeniably compliance intensive, and marks a paradigm shift from the regime hitherto existing. Prior to the introduction of the 2025 RPT Circular, the information required to be provided to the audit committee and the shareholders was limited.[30] Additionally, the shareholders were only required to be provided a summary of the information provided to the audit committee, and there was greater flexibility to provide any additional relevant information.[31]

In contrast, the Industry Standards introduce significantly larger disclosure requirements. Four such instances are discussed below.

First, listed entities are now required to provide details with respect to number of bids received in relation to sale, purchase or supply of goods or services or any similar business transaction. In the absence of any bids or quotations, a justification is required to be furnished as to why such bids were not invited. In practice, it may not be common to invite bids for such transactions in all cases.

Second, the requirement for peer benchmarking, though well-intentioned, can become impractical in niche industries or technology-heavy businesses, where a true comparable may not exist. Smaller listed entities may struggle with the resource and cost burden of engaging third-party valuers, preparing multi-year historical disclosures, and seeking shareholder approval for high-volume but low-risk transactions. Having said that, the Industry Standards do provide that if no suitable Indian or global listed peer is available, then the peer group considered by SEBI registered research analysts in their publicly available research reports may be considered, which may be faced with similar issues.

Third, in relation to payment of royalty by listed entities to a related party, the Industry Standards now prescribe disclosure of granular details such as: (i) purpose and components of royalty (use of brand name, transfer of technology, corporate management fee etc); (ii) details of dividend paid in the last 3 years and rationale for the dividend being lower than the royalty payment (if applicable); and (iii) details of in-house R&D expenses incurred by the listed entity to reduce or eliminate payment of royalty along with the period required for completing such R&D; (iv) if royalty is being paid to the parent company, details relating to royalty received by the parent company from other foreign entities; and (v) peer comparison.

Fourth, the Industry Standards require the value of the proposed transaction as a percentage of the standalone turnover of the related party for the immediately preceding financial year to be provided, which was earlier required to be provided on a voluntary basis.[32]

4. CONCLUSION

The introduction of the Industry Standards by SEBI must be seen in the larger context of a regulatory regime seeking to strike a balance between ensuring corporate accountability and preserving operational flexibility. Ultimately, the Industry Standards mark a regulatory maturation, one that reflects SEBI’s view that shareholder trust and systemic stability must go hand in hand with the ease of doing business. While the burden of implementation in light of the scale of the changes is real, so too is the cost of inaction, as evidenced by the market erosion and regulatory sanctions in prior RPT-related corporate collapses. As such, this framework should not be viewed merely as a compliance hurdle, but as a structural safeguard against reputational and governance risk.

[1] SEBI Circular No. SEBI/HO/CFD/PoD2/CIR/P/0155, accessible here.

[2] SEBI Circular No. SEBI/HO/CFD/CFD-PoD-2/P/CIR/2025/18, accessible here.

[3] Industry Standards on “Minimum information to be provided for Review of the Audit Committee and Shareholders for Approval of Related Party Transaction (RPT)”, accessible here.

[4] Per the objective and purpose clause of the Industry Standards, any amendment to the Industry Standards shall be made only in consultation with SEBI.

[5] These amendments led to the expansion of the definition of a ‘related party’ and ‘related-party transactions’, revision in threshold to determine materiality, and closer scrutiny of subsidiary-level transactions, among other aspects.

[6] Regulation 23(2), SEBI LODR; Section 177, Companies Act.

[7] Regulation 23(4), SEBI LODR.

[8] For any companies listed on the SME Exchange, an RPT will be deemed material if the transaction individually or taken together with previous transaction(s) during a financial year exceeds the lower of: (i) INR 50 crores or (ii) 10% of the annual consolidated turnover of the listed entity, in each case, as per the last audited financials.

[9] Regulation 23(1), SEBI LODR.

[10] Disclosure obligations of listed entities in relation to Related Party Transactions, dated November 22, 2021, accessible here. The Original RPT Circular came into effect on April 01, 2022, and was consolidated into Section III-B of the Master Circular.

[11] Shareholder approval is required to be obtained by way of an ordinary resolution. No related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.

[12] Circular Ref. No. SEBI/HO/CFD/CFD-PoD-2/P/CIR/2025/37, accessible here.

[13] The Industry Standards Forum released FAQs in relation to the Industry Standards, which were circulated among listed entities by the NSE (vide circular no. NSE/CML/2025/12) and BSE (vide circular no. 20250315-3). The clarificatory FAQs were issued by the Industry Standards Forum and circulated by the NSE and the BSE, the FAQs have been issued for the purpose of removing ambiguities. 

[14] Para II (1), FAQs on Industry Standards, accessible here.

[15] Para II (2), FAQs on Industry Standards, accessible here.

[16] Para II (4), FAQs on Industry Standards, accessible here.

[17] Sub-para 2 of para 1 of the Industry Standards.

[18] Promoter or promoter group shall be deemed to be concerned or interested in any person, if it, in any way, whether directly or indirectly: (a) where the person is a body corporate, holds more than 2% shareholding or voting rights of that body corporate, or is a promoter, managing director, manager, Chief Executive Officer of that body corporate; or (b) where the person is a firm or other entity, the promoter(s) or the promoter group is a partner, owner or member, as the case may be.

[19] The transactions with a related party where the transaction(s) to be entered into individually or taken together with the previous transactions during a financial year exceeds the lower of: (i) 2% of turnover; or (ii) 2% of net worth (except where net worth is negative) (each as per last audited financials of the listed entity); or (iii) 5% of the average absolute value of profit or loss after tax, as per the last three audited consolidated financial statements of the listed entity (“Specified Thresholds”).

[20] Sub-para 3 of para 1 of the Industry Standards. Separately, the various levels of disclosures envisaged under the Industry Standards have been discussed below at Para 2.3(b).

[21] The concept of a balance sheet item under the Industry Standards is discussed below at para 2.3(c).

[22] The concept of a profit & loss item under the Industry Standards is discussed below at para 2.3(c).

[23] Para 4 of the Industry Standards sets out an elaborate format for disclosure of multiple pieces of information in relation to an RPT. An extensive list of entries is specified, categorised against which, information as applicable is required to be furnished by the management and the audit committee is required to give its comments against each such disclosure made by the listed entity. Additionally, in certain cases, the audit committee is required to provide justification for non-availability of information (such as non-availability of peer comparison).

[24] Generally speaking, transactions relating to balance sheet items tend to have longer-term implications for the financial structure of the entity and may significantly affect leverage, solvency, or capital allocation. Accordingly, they generally attract a higher standard of disclosure and more rigorous approval protocols, including comprehensive disclosures even where the Specified Thresholds are not exceeded.

[25] Generally speaking, transactions relating to profit and loss items are often recurring and operational in nature. However, even if they do not exceed the Specified Thresholds but involve parties with promoter affiliation, they may still require limited disclosures to be made.

[26] Para 3 of the Industry Standards.

[27] Under the Industry Standards, the audit committee is required to be provided with the audited financials of the related party in certain circumstances. In situations where the audited financials are not available for any particular year, the financial details shall be certified by the related party.

[28] Para 5 of the Industry Standards.

[29] Note that this requirement is only applicable (i) in case of sale, purchase, or supply of goods or services or other similar transaction; or (ii) the sale, lease, or disposal of assets of a subsidiary, unit, division, or undertaking of the listed entity or disposal of shares of a subsidiary or associate.

[30] Limited information, such as the identity of the related party, material terms, value & tenure of the transaction, specific details in case the transaction is related to inter-corporate deposits, valuation report and justification as to why the transaction is in the interest of the listed entity, etc. was required to be provided to the audit committee and the shareholders prior to the 2025 RPT Circular.

[31] Para 6 of the Original RPT Circular.

[32] Paras 4 and 6 of the Original RPT Circular.