SEBI’s New Disclosure Standards for Related Party Transactions and Corporate Governance Implications

[Veenita is a student at Gujarat National Law University.]

The Securities and Exchange Board of India (SEBI) on 14 February 2025 introduced new disclosure standards through circular (SEBI/HO/CFD/CFD-PoD-2/P/CIR/2025/18), which establishes minimized disclosure requirements for listed entities to ensure stability in related party transaction (RPT) approvals. Regulations 23(2), 23(3) and 23(4) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations) require approval by shareholders and an audit committee for RPTs. The circular was issued in exercise of the powers conferred under Section 11(1) and Section 11A of the SEBI Act 1992 read with Regulation 101 of the LODR Regulations. 

The Regulatory Backdrop

RPTs have played an essential role in business operations. When conducted with vertical integration, RPTs ensure an efficient supply chain and in case of horizontal integration, it provides better market reach. In the case of intra-group transactions, RPTs provide a more reliable framework. However, when such transactions compromise market integrity by lacking transparency or involving unfair pricing, they tend to benefit a select few at the expense of public shareholders. RPTs have been governed by the Companies Act 2013 and the LODR Regulations. The SEBI master circular dated 11 November 2024 (Master Circular) for compliance with the provisions of the LODR Regulations by listed entities laid down an updated framework for compliance with several obligations. It is specified that the information regarding RPTs shall be placed before the audit committee and shareholders for consideration under Parts A and B of Section III-B.

Key Provisions in the New Disclosure Standards

Industry Standards Forum

The circular for industry standards mandates listed entities seeking RPT approval to adhere to standardized disclosure norms. The Industry Standards Forum (ISF) comprising representatives from the Associated Chambers of Commerce and Industry of India, Confederation of Indian Industry, Federation of Indian Chambers of Commerce and Industry, has composed industry standards in consultation with SEBI under the aegis of the stock exchanges. The stock exchanges and associations that are part of the ISF shall publish the industry standards on their respective websites. 

Audit committee review

For the approval of RPTs, listed entities shall now provide the audit committee comprehensive details as per the new Industry Standards on Minimum Information when placing any proposal for review and approval of any related party transactions. 

The Master Circular dated 11 November 2024 modified Section III-B s follows:

“The listed entity shall provide the audit committee with the information as specified in the Industry Standards on “Minimum information to be provided for review of the audit committee and shareholders for approval of a related party transaction”, while placing any proposal for review and approval of an RPT.”

Shareholder approval 

As per the circular, notices sent to shareholders shall contain an expanded explanatory statement while incorporating critical financial and governance insights beyond those mandated under the Companies Act 2013. 

The Master Circular modified Paragraph 6 under Part B of Section III-B as follows:

“The notice being sent to the shareholders seeking approval for any RPT shall, in addition to the requirements under the Companies Act, 2013, include the information as part of the explanatory statement as specified in the Industry Standards on “Minimum information to be provided for review of the audit committee and shareholders for approval of a related party transaction.”

Implementation timeline

The new disclosure requirements will come into effect on 1 April 2025. The compliance will be overseen by stock exchanges and industry associations, which will publish the standards on their websites. 

SEBI’S RPT Analysis Portal: A Game-Changer for Transparency

A significant ‘transformative initiative’ as highlighted by Shri Ashwani Bhatia, Whole Time Member, SEBI, in the speech dated 14 February 2025,”was introduced by SEBI with the launch of the RPT Analysis Portal, unveiled on 14 February 2025. This platform is developed in collaboration with three proxy advisory firms, the portal aims to democratize access to RPT governance data. Proxy advisory firms analyze governance practices and financials. However, with the launch of the portal, all investors, whether retail or institutional shall have access to crucial information on RPTs. The key features of the portal include:

Centralized data repository: Provides a standardized database for RPT disclosures across listed entities, providing investors with streamlined access to comprehensive governance data.

Benchmarking mechanism: The platform facilitates comparative analysis of RPTs across different companies, enabling an assessment of fairness, regulatory compliance, and corporate governance practices.

Market efficiency enhancement: By ensuring public access to critical governance data, SEBI seeks to enhance transparency, strengthen corporate accountability, and support informed decision-making in financial markets.

Compliance Implication for Listed Entities

The disclosure structure implements additional compliance requirements on listed companies, requiring internal control and due diligence. Companies will now have to ensure that audit committees and shareholders get detailed, standardized information before approving an RPT. It promotes transparency but also increases administrative costs, especially for small firms. 

Failure in compliance with the prescribed disclosure criteria can cause regulatory scrutiny and attract penalties, which can strengthen the need for strong and robust governance practices. Companies may also face legal consequences, if the RPTs violate minority shareholder rights or breaches fiduciary responsibilities.

Strengthening Minority Shareholder Rights

Rigid RPT criteria represent an important step towards safety of minority shareholders by preventing opaque transactions that benefit the stakeholders to control the benefits. Since minority shareholders are often vulnerable for potential abuses in RPTs, where most shareholders are controlling institutions and can execute transactions that can benefit themselves at the cost of minority interests. SEBI's new industry standard ensures that minority shareholders can better evaluate the fairness of RPTs. Comprehensive shareholder approval requirements provide more transparency and decision-making power that ensures that the respective party transactions are subject to increased scrutiny. 

While these measures improve accountability, their actual impact on minority shareholders will depend on how effectively they are enforced. The effectiveness of these disclosures depends on whether they lead to meaningful scrutiny of majority control, thereby preventing the erosion of shareholder value. Additionally, the RPT Analysis Portal increases access to governance data, but it remains to be seen as to what extent the minority shareholders can be seen to take advantage of this device for meaningful engagement.

Regulatory Oversight and Enforcement Challenges

While SEBI has determined tight disclosure mandates, the effectiveness of these reforms depends on strong enforcement mechanism. Regulatory bodies will now play an active role to monitor the disclosures, ensuring that companies are not engaged in symbolic compliance. Audit committees should also be equipped with adequate expertise and freedom to effectively scrutinize RPTs. Additionally, the role of proxy advisory firms in analyzing these transactions for institutional investors will be important in determining whether market discipline has been imposed through active investor participation or the only procedural formalities remain. 

In addition, investor education and regulatory awareness remain underdeveloped aspects of compliance. Many retail investors have a lack of necessary resources and understanding to identify and challenge inappropriate RPTs. Thus, by providing educational initiative focused on the implications of RPT, regulatory investors can empower investors to play an active role in corporate governance, promoting new age shareholders who can advocate their rights.

Final Observations

SEBI's new disclosure standards for RPTs envision to strengthen the standard corporate governance practices and ensure market integrity. The purpose of SEBI is enhancing investor's confidence by applying stringent disclosure norms. The RPT Analysis Portal, combined with a standardized disclosure framework, provides more access to stakeholders, especially minority shareholders, more access to governance data and enhances decision-making power. The new industry standard provides an integrated platform for retrieving standardized information on RPTs, which enables institutional and retail investors to call for improved governance practices from firms in which they invest. 

The success of such reforms depends on strong enforcement and effective shareholder partnership. Institutional investors can benefit from increased transparency, but it may be difficult to participate in a meaningful participation due to the nature of the disclosures of retail shareholders. Listed entities, especially small companies, will face increased compliance costs, raising concerns about the proportionality of regulatory requirements. 

Therefore, in order to ensure long-term success, regulatory bodies must actively monitor compliance, audit committees must exercise independent scrutiny, and shareholders should utilize the available data to enforce accountability. While SEBI’s reforms mark a significant advance, their true impact will depend on whether they lead to substantive improvements in governance or result in mere procedural compliance. The future years will be pivotal in deciding whether or not these steps effectively achieve the right equilibrium between openness, regulatory effectiveness, and company freedom.