Related Party Transactions in India: Legal Framework, Risks, And Reforms

UNDERSTANDING RELATED PARTY TRANSACTIONS – LEGAL FRAMEWORK & CORE CONCEPTS

Related Party Transactions (RPTs) are contracts between a company and an individual or entity that has already had a relationship with the company. Some of the examples of RPTs are the sale or purchase of goods, property leases, service contracts, etc.[1]  In the context of Section 2(76) of the Companies Act, 2013, related parties are directors, key managerial personnel (KMP), and relatives, affiliates (subsidiaries, holding, associate companies), firms or companies in which the directors or key managerial personnel (KMP) have interests, as well as other entities as stipulated by the law.[2]

Despite such transactions being normal and common in the operation of the business, they are also abused by the insiders at the cost of the business or its shareholders. Malicious RPTs make profits out of under- or overpriced transactions, opaque loans or guarantees, and complicated transfers of shares. As an illustration, the sale of company goods at a low price to an affiliate would be a classic case of abuse. Nevertheless, RPTs carried out in the normal day running of business on arm arm’s-length basis may be valid and even cost-effective to a business group.[3]

Malicious RPTs are becoming a growing concern as insiders secretly take funds out of the company for their benefit. Indian laws have several legislative regulations to prevent such misuse, including Section 184 of The Companies Act, 2013, which states that directors must disclose their interests in any company, firm, or entity with which the company plans to do any business, and Section 189 of the same makes it compulsory to maintain a register of such disclosures.[4][5] Section 177 (read with SEBI LODR Regulation 23 for listed firms) gives power to the Audit Committee, led by independent directors, to review all Related-Party Transactions and provide prior approval.[6] Additionally, Contractual RPTs are governed under Section 188, and when they are above the specified criteria, board and shareholder approval is required. Essentially, Section 188 ensures the Board and shareholders sign off on large or non-arm’s-length RPTs.[7] Section 40A (2) of the Income Tax Act, 1961 disallows Excessive or unreasonable payments to related parties as a tax deduction if they exceed fair market value or business needs.[8]

Overall, the regulatory laws of RPT are a result of the need to comply with fiduciary duty and resolve conflicts of interest. RPT regulations acknowledge that there are chances of conflict of interest in an insider transaction, and directors and promoters are subject to a duty of loyalty to the company. The regulation seeks to limit the bad faith self-dealing by making disclosures, independent supervision, and approval processes. Finally, transparency and adherence to the arm’s-length principle can be used to ensure the RPTs are conducted in a fair manner and that they bring benefits to the firm and its stakeholders.

REAL-WORLD CORPORATE SCAMS INVOLVING RPTs

Although laws exist to prevent the abuse of related party transactions, a number of high-profile cases demonstrate that the insiders continue to use them to steal funds out of the company and work against the financial interests of the shareholders. A prime case study is that of ICICI Bank-Videocon loan, where the then-CEO Chanda Kochhar of ICICI granted huge loans to the Videocon group, which in turn defaulted, and supposedly the benefits were channelled back to the companies associated with Chanda Kochhar. In a case, Venugopal Dhoot of Videocon had directed 64 crores in the middle companies to the NuPower Renewables business of the Kochhars. A residential flat (worth ₹5.25 crore) possessed by Videocon was resold to the family trust of the Kochhars at 11 lakhs.[9]

The Videocon loan provided by Chanda Kochhar failed to fulfil the conditions of a related party transaction as defined under Section 2(76) of the Companies Act, 2013, because there was no direct interest or formal relation between the group and Chanda Kochhar. Although there were quid-pro-quo components, there is not enough ground to state that she was acting on the directives of Venugopal Dhoot, and it is not probable that it falls under Section 2(76)(vii) of the same. This scandal is a vivid example of how related-party transactions and quid-pro-quo investments that are not disclosed may destroy governance and erode the confidence of investors.

The other notable case was that of Sun Pharma, which passed all its domestic sales to Aditya Medisales Ltd. (AML), a company owned by promoters Sudhir Valia and Dilip Shanghvi. AML was formally made a related party in FY2018, but a whistleblower alleged that massive funds were diverted prior to this formal inclusion. Reports of the whistleblower complaint caused a fall in the share price of Sun Pharma, as it became public that AML had funnelled over ₹5,800 crore using Sun Pharma funds. SEBI followed it up with an order of a forensic audit, which found irregularities in AML arrangements that were contrary to the norms of disclosure. In 2021, Sun Pharma and its executives paid SEBI and admitted that they had breached listing regulations by concealing AML transactions and were fined by regulators as a result of the offense. This situation demonstrates how distribution transactions on promoters can conceal illegal flows of cash unless all the regulating forces require complete disclosure. [10]

More recently, the Adani group controversy (2022–23) highlighted offshore RPTs. The report prepared by Hindenburg and the findings made by SEBI showed that Adani companies did not disclose the Related-Party Transactions of loans among group companies to contracts with foreign partners, which are opaque. Most of these dealings entailed multi-layered dealings via shell companies abroad that were in the possession of insiders.[11]

These cases collectively show a common lesson, i.e., less disclosed or non-arm-length RPTs commonly are vehicles used to enrich promoters and commit frauds, which explains why such activities should be strenuously regulated and enforced.

REFORMS AND REGULATORY RESPONSE – SEBI’S TIGHTENED RPT REGIME

The SEBI has responded to such abuses by considerably increasing the RPT regime of listed companies. Investor protection was the main factor as regulators observed that insiders of most companies were using loopholes in the law to embezzle company funds. Late 2021 and 2022 (effective FY2022-23) amendments were made on the advice of a SEBI Working Group. These reforms extend the coverage of related party and related-party transactions, which subject inter-group transactions to greater scrutiny, and the disclosure requirements. SEBI has now explicitly covered any promoter or promoter-group entity and any person possessing more than 20% of shares (and ≥10% as of April 1, 2023), as a related party, thus extending the coverage of the Companies Act, which only referred to the 20% threshold.[12]  This snares more affiliates and big investors in the RPT umbrella. The concept of a Related-Party Transaction was also redefined, wherein such transactions included not only deals involving the listed company and its related parties but also deals involving any other party, the intent of which is to enrich a related party of the company or one of its subsidiaries. Practically, this expansion implies that even the transactions that are done with third parties can be monitored, provided that they are effective in making the funds flow to the insiders.

In order to use this broader interpretation of RPTs, SEBI introduced the “Purpose-and-Effect test to identify concealed or indirect transactions that benefit related parties. The purpose and effect provision is directly aimed at camouflaged RPTs. According to this rule, a transaction will be considered as an RPT in case the aim and outcome of the transaction are to be advantageous to a party that is related. This prevents loopholes whereby promoters may make indirect transfers with the help of third parties. [13]

SEBI also raised SEBI has revamped the framework for material Related Party Transactions (RPTs), linking thresholds to a company’s annual consolidated turnover and capping material transactions at ₹5,000 crore to protect minority shareholders. Transactions exceeding these thresholds now require prior shareholder approval, and audit committees must review all RPTs with reasoned recommendations. By replacing the old ₹1,000 crore/10% rule, SEBI aims to focus oversight on significant deals while simplifying compliance for smaller transactions and subsidiaries. [14]

Notwithstanding the intent, the new norms pose practical difficulties. The “purpose and effect” determining intent may invite lengthy disputes. In balancing these issues, SEBI’s reforms have clear pros and cons. On the plus side, they close many loopholes, related parties, and hidden affiliates can no longer escape notice, and regulators/investors now receive richer information. The expanded regulations also raise governance standards, compelling boards to think twice before approving cozy deals. On the downside, compliance complexity has jumped. Companies must analyse ever-larger swathes of transactions for RPT status, maintain elaborate registers, and prepare detailed justifications, all of which increase legal and administrative costs. Thus, while the reforms undoubtedly strengthen oversight, they also demand clear guidance and capacity-building in enforcement to be effective.

Notwithstanding the intent, the new norms present practical challenges. The intent as determined by the purpose and effect, can bring about protracted arguments. There are definite advantages and disadvantages to the reforms of SEBI in the process of balancing these issues. On the plus side, they close many loopholes, related parties, and hidden affiliates can no longer escape notice, and regulators/investors now receive richer information. The widened regulations also increase the standard of governance, making boards to think twice and approve cozy deals. On the downside, there is an increased complexity in compliance. RPT status requires companies to analyse larger and larger volumes of transactions, keep elaborate registers and make detailed justifications, which add to the legal and administrative expenses. Thus, while the reforms undoubtedly strengthen oversight, they also demand clear guidance and capacity-building in enforcement to be effective.

THE WAY FORWARD – BRIDGING LEGAL GAPS AND STRENGTHENING ENFORCEMENT

Judicial precedents have also played a vital role in expanding and clarifying the scope of Related-Party Transactions (RPTs). In Golden Tree Hotels Pvt. Ltd. v. ROC (2019), it was held that a loan to a partnership business, whose partners were also shareholders, was also an RPT.[15] Here, the tribunal was concerned with shared control and benefit, and a substance over form approach was emphasized. with joint control and advantage, and a substance over form approach was emphasized. Similarly, in Linde India Ltd. v. SEBI (2024), SEBI pointed out that all transactions with a related party must be treated in the aggregate to test materiality, rather than considering each contract separately.[16] Although these precedents have brought an improvement in the regulation of RPT, there are still problems, and the Companies are still taking advantage of technical loopholes. Resources being limited, regulators cannot audit every flagged case. This has resulted in the selective application of the rules, where most of the listed firms have been able to break disclosure laws with impunity. Those rulings show that having a related-party link alone did not really impose a strict duty of loyalty absent an actual wrongdoing; they provide clear support for defining better standards. Reforms to strengthen the RPT framework have been proposed. As an example, standardized disclosure templates may be mandatory in a way that investors and shareholders have the relevant facts about pricing, valuations, justifications, and protective measures that are reported in a similar format so that the boards can detect abnormalities. Stronger auditing and compliance should be considered; there should be more rigorous auditing and compliance, disclosures should be overseen by auditors, and maybe by random forensic audit, as well as audit committees should demand independent valuations or the offering of competitive bids in large transactions. Occasional internal audits for related-party accounts will also provide a serious deterrent. The proxy advisory firms and shareholders will keep tabs on any abuse of RPTs. Independent proxy advisory firms (ISS, ICRA, etc.) have started flagging suspicious proposals and influencing votes.

Finally, related-party transactions are in between the area of business need and possible misuse. Legal systems and court rulings have contributed to their regulation, but a lot remains to be done on how the rules are going to be applied and enforced. Strict legislation is not the only way to reform, but to build a culture of transparency, accountability, and ethical governance. The systems controlling businesses need to expand as the business becomes more and more complex. Making sure that the dealings between related parties are equitable and handled in a responsible manner is, of course, necessary not only to comply with them but also to foster trust and integrity in the Indian corporate environment.

Author:– Akshat Chauhan,  in case of any queries please contact/write back to us atsupport@ipandlegalfilings.com or   IP & Legal Filing.

REFERENCES

• “GN5_Guidance_Note_on_Related_Party_Transactions” (ICSI, January 12, 2023) <https://www.icsi.edu/media/webmodules/GN5_Guidance_Note_on_Related_Party_Transactions.pdf> accessed August 20, 2025
• Companies Act 2013, No 18 of 2013, s 2(76) (India).
• CARP, Hawaldar IT and T M, “Related Party Transactions and Audit Risk” (2021) 8 Cogent Business & Management https://doi.org/10.1080/23311975.2021.1888669
• Companies Act 2013, No 18 of 2013, s 184 (India).
• Companies Act 2013, No 18 of 2013, s 189 (India).
• Companies Act 2013, No 18 of 2013, s 177 (India).
• Companies Act 2013, No 18 of 2013, s 188 (India).
• Income-tax Act 1961, No 43 of 1961, s 40A(2) (India).
• Online E, “Chanda Kochhar-Videocon Fraud Case: A ₹3,250 Cr Loan, ₹64 Cr Bribe & ICICI’s Top Banker’s Alleged Role In” The Economic Times (July 22, 2025) https://economictimes.indiatimes.com/industry/banking/finance/banking/what-is-chanda-kochhar-videocon-loan-fraud-case-a-3250-crore-loan-64-crore-bribe-icicis-top-bankers-alleged-role-in-it-along-with-husband-deepak-kochhar-and-venugopal-dhoot-cbi-supreme-court-ruling/articleshow/122831309.cms?from=mdr
• PTI, “Sun Pharma, Officials Including Dilip Shanghvi Settle Case of Alleged Market Norms Violation with SEBI” The New Indian Express (February 11, 2021) <https://www.newindianexpress.com/business/2021/Feb/11/sun-pharma-officials-including-dilip-shanghvi-settle-case-of-alleged-market-norms-violation-with-se-2262722.html>
• “Adani Group: How the World’s 3rd Richest Man Is Pulling the Largest Con in Corporate History – Hindenburg Research” (January 24, 2023) https://hindenburgresearch.com/adani/
• “SEBI | Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021” https://www.sebi.gov.in/legal/regulations/nov-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-sixth-amendment-regulations-2021_53851.html
• Harathi H, “Innovative Structures Vis-à-Vis Ordinary Course of Business: Critically Analyzing the Purpose and Effect Test” (IRCCL, March 10, 2024) https://www.irccl.in/post/innovative-structures-vis-%C3%A0-vis-ordinary-course-of-business-critically-analyzing-purpose-and-effect
• “Sebi to Introduce Threshold-Based Framework to Determine Materiality of Related Party Transactions” Outlook Business (September 13, 2025) https://www.outlookbusiness.com/economy-and-policy/sebi-to-introduce-threshold-based-framework-to-determine-materiality-of-related-party-transactions
• Golden Tree Hotels Pvt. Ltd. v. ROC (2019)
• “SEBI | Order in the Matter of Linde India Ltd.” <https://www.sebi.gov.in/enforcement/orders/jul-2024/order-in-the-matter-of-linde-india-ltd-_84952.html>

[1] “GN5_Guidance_Note_on_Related_Party_Transactions” (ICSI, January 12, 2023)  <https://www.icsi.edu/media/webmodules/GN5_Guidance_Note_on_Related_Party_Transactions.pdf> accessed August 20, 2025

[2] Companies Act 2013, No 18 of 2013, s 2(76) (India).

[3] CARP, Hawaldar IT and T M, “Related Party Transactions and Audit Risk” (2021) 8 Cogent Business & Management <https://doi.org/10.1080/23311975.2021.1888669>

[4] Companies Act 2013, No 18 of 2013, s 184 (India).

[5] Companies Act 2013, No 18 of 2013, s 189 (India).

[6] Companies Act 2013, No 18 of 2013, s 177 (India).

[7] Companies Act 2013, No 18 of 2013, s 188 (India).

[8] Income-tax Act 1961, No 43 of 1961, s 40A(2) (India).

[9] Online E, “Chanda Kochhar-Videocon Fraud Case: A ₹3,250 Cr Loan, ₹64 Cr Bribe & ICICI’s Top Banker’s Alleged Role In” The Economic Times (July 22, 2025)

[10] PTI, “Sun Pharma, Officials Including Dilip Shanghvi Settle Case of Alleged Market Norms Violation with SEBI” The New Indian Express (February 11, 2021) <https://www.newindianexpress.com/business/2021/Feb/11/sun-pharma-officials-including-dilip-shanghvi-settle-case-of-alleged-market-norms-violation-with-se-2262722.html>

[11] “Adani Group: How the World’s 3rd Richest Man Is Pulling the Largest Con in Corporate History – Hindenburg Research” (January 24, 2023) <https://hindenburgresearch.com/adani/>

[12] “SEBI | Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021” <https://www.sebi.gov.in/legal/regulations/nov-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-sixth-amendment-regulations-2021_53851.html>

[13] Harathi H, “Innovative Structures Vis-à-Vis Ordinary Course of Business: Critically Analyzing the Purpose and Effect Test” (IRCCL, March 10, 2024) <https://www.irccl.in/post/innovative-structures-vis-%C3%A0-vis-ordinary-course-of-business-critically-analyzing-purpose-and-effect>

[14]“Sebi to Introduce Threshold-Based Framework to Determine Materiality of Related Party Transactions” Outlook Business (September 13, 2025) <https://www.outlookbusiness.com/economy-and-policy/sebi-to-introduce-threshold-based-framework-to-determine-materiality-of-related-party-transactions>

[15] Golden Tree Hotels Pvt. Ltd. v. ROC (2019)

[16] “SEBI | Order in the Matter of Linde India Ltd.” <https://www.sebi.gov.in/enforcement/orders/jul-2024/order-in-the-matter-of-linde-india-ltd-_84952.html>