Corporate governance plays a crucial role in maintaining investor confidence, ensuring ethical financial practices, and safeguarding the interests of minority shareholders. One of the key aspects of corporate governance is the regulation of related party transactions (RPTs), which can have significant implications for financial integrity and transparency. In response to concerns over the fairness and accountability of such transactions, the Securities and Exchange Board of India (SEBI) has introduced industry standards to establish a uniform disclosure framework for RPT approvals.
Effective from April 1, 2025, this regulatory enhancement aims to streamline the process of evaluating and approving RPTs by the audit committee and shareholders, as mandated under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). The newly established standards, formulated under the Industry Standards Forum (ISF) comprising ASSOCHAM, CII, and FICCI, set a comprehensive benchmark for disclosure, ensuring that all listed entities operate with enhanced transparency and regulatory compliance. By incorporating these changes into the SEBI Master Circular, the regulator seeks to create a level playing field for all market participants, reducing the risks associated with non-transparent related party dealings and potential financial mismanagement.
Regulatory framework, key changes
The revised regulations stem from SEBI’s efforts to strengthen corporate governance mechanisms and align Indian financial practices with global standards. Regulations 23(2), (3), and (4) of the LODR Regulations mandate that RPTs undergo rigorous scrutiny by audit committees and obtain shareholder approval, if deemed material. Previously, there was a lack of uniformity in the nature and extent of the disclosures provided during the approval process, often leading to incomplete or inadequate information being presented for evaluation.
The new amendments to Section III-B of the SEBI Master Circular address these gaps by ensuring that all listed entities follow a structured disclosure framework when seeking approval for RPTs. Under the updated guidelines, Part A of the Master Circular requires detailed information to be provided to the audit committee, including the terms, purpose, rationale, financial impact, and business justification of the transaction. Part B outlines the disclosure obligations for shareholder approval, ensuring that investors have access to all necessary information when making informed decisions regarding RPTs.
By implementing these amendments, SEBI has taken a significant step toward reinforcing investor confidence and mitigating conflicts of interest that often arise in related-party dealings. The requirement for standardised disclosures ensures that all material RPTs undergo thorough scrutiny, eliminating ambiguity, and promoting transparency in financial transactions. Moreover, the decision to include industry associations, such as ASSOCHAM, CII, and FICCI, in the formulation of these standards reflects SEBI’s commitment to fostering industry-wide participation in regulatory compliance. These changes are expected to lead to more responsible corporate behaviour by discouraging opaque transactions and compelling companies to act in the best interests of all stakeholders.
Implications for listed entities
For listed companies, the implementation of revised disclosure standards represents both opportunities and challenges. On the positive side, increased transparency in RPT approvals enhances investor trust, improves corporate reputation, and attracts more foreign and domestic investment. Investors, particularly institutional stakeholders, often prioritise well-governed companies with robust disclosure practices, making compliance with SEBI’s new regulations a competitive advantage. Moreover, standardising the disclosure framework helps companies avoid regulatory discrepancies, ensuring that their RPT approvals meet the highest levels of scrutiny.
However, regulatory shifts entail several challenges. The requirement for extensive disclosure places an additional compliance burden on companies, necessitating significant investments in financial reporting, internal controls, and governance frameworks. Compliance teams must be adequately trained to ensure adherence to new guidelines, and companies may need to adopt advanced digital solutions to streamline documentation and approval processes. Additionally, increased scrutiny of RPTs may slow down decision-making processes, as transactions that were previously approved with minimal oversight will now require comprehensive justification and documentation. This could affect business agility, particularly for companies engaged in complex corporate structures with multiple related party engagements.
To navigate these challenges, companies must proactively align their internal policies with the SEBI’s updated requirements. Establishing dedicated RPT review committees, enhancing board oversight, and integrating technology-driven compliance solutions can help mitigate risk and improve efficiency. Furthermore, companies should engage in regular communication with regulatory authorities to seek clarification on complex transactions and ensure that their disclosures meet the expectations of both auditors and investors. A proactive approach to compliance will not only help businesses adapt to the regulatory landscape, but also reinforce their commitment to ethical governance practices.
Challenges and adaptation strategies
The implementation of SEBI’s new industry standards for RPT approval is not without its hurdles. One of the primary challenges faced by companies is the subjective nature of determining materiality in party transactions. While SEBI has outlined broad disclosure requirements, the interpretation of what constitutes a “material” RPT may vary across organisations, leading to inconsistencies in implementation. Therefore, companies must establish clear internal policies to assess materiality thresholds and ensure that audit committees possess the necessary expertise to evaluate the significance of each transaction objectively.
Another challenge is the increased documentation burden associated with new regulations. Companies are now required to provide extensive details on the rationale, financial implications, and business necessity of each RPT, which may prolong the approval process. Smaller firms, in particular, may struggle with the added workload as they often lack dedicated compliance teams to handle regulatory reporting. To address this issue, companies should explore the use of compliance automation tools and digital reporting platforms to streamline the disclosure process and reduce administrative overhead.
Companies must also be prepared to address the heightened scrutiny of investors and regulatory bodies. As transparency standards improve, shareholders are likely to demand greater accountability from management regarding related-party dealings. Companies must adopt a proactive investor relations strategy to ensure that all relevant information is communicated to stakeholders clearly and effectively. This may include conducting regular investor briefings, issuing detailed explanatory statements for RPT approvals, and maintaining open channels of communication with regulators to demonstrate commitment to compliance.
Furthermore, SEBI’s decision to entrust stock exchanges, while ensuring compliance, adds an additional layer of oversight to the regulatory process. Stock exchanges play a crucial role in monitoring adherence to new disclosure standards, and may impose penalties on companies that fail to comply. To avoid potential regulatory actions, listed entities must prioritise compliance by integrating best practices in corporate governance, strengthening internal audit functions, and fostering a culture of transparency across all levels of the organisation.
Charting the path ahead
The introduction of industry-wide standards for RPT disclosures marks a significant milestone in India’s corporate governance landscape. By mandating structured and comprehensive disclosures, SEBI has taken a decisive step toward enhancing transparency, reducing conflicts of interest, and protecting investors’ rights. While the transition to the new regulatory framework presents certain challenges, the long-term benefits of improved corporate accountability and investor confidence far outweigh initial compliance costs.
To ensure smooth implementation, companies must adopt a strategic approach to compliance, leverage technology-driven solutions, enhance board oversight, and foster a culture of ethical governance. Audit committees play a pivotal role in rigorously evaluating RPTs and ensuring that transactions align with the best interests of all stakeholders. Additionally, continued engagement between SEBI, industry associations, and listed entities is essential in addressing any ambiguities in the regulatory framework and facilitating a seamless transition.
Looking ahead, SEBI’s initiative set a strong precedent for future regulatory reforms aimed at strengthening corporate governance standards in India. As global investors increasingly prioritise transparency and ethical business practices, adherence to these new standards will favour Indian companies in the international market. By proactively embracing these regulatory changes, businesses can build a resilient governance framework that not only ensures compliance but also enhances long-term shareholder value. Moving forward, continuous dialogue between regulators, market participants, and industry stakeholders will be key to further refining these standards, ensuring that India remains at the forefront of global corporate governance excellence.
The writer is Assistant Professor and Research Guide, Department of Commerce, St Thomas College (Autonomous), Thrissur, Kerala
