Related Party Transaction Rules in India: SEBI & Companies Act Compliance

Why Related Party Transactions Matter for Foreign Investors in India

Under Regulation 23 of SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015 — read with Section 188 of the Companies Act, 2013 — every related party transaction (RPT) must be pre-approved by the audit committee regardless of value, and an RPT that is material also requires shareholder approval by ordinary resolution. The Companies Act applies its own approval regime to every company; SEBI's LODR layer applies additionally to listed entities.

What counts as material changed at the end of 2025. The SEBI (LODR) (Fifth Amendment) Regulations, 2025, notified on 19 November 2025, replaced the flat "INR 1,000 crore or 10% of annual consolidated turnover, whichever is lower" test with a graded, turnover-linked framework set out in a newly inserted Schedule XIII. Because the applicable figure now depends on the listed entity's own turnover band, identify your band before applying any threshold — there is no longer a single headline number.

Schedule XIII sets the following bands, measured on the listed entity’s annual consolidated turnover for the immediately preceding financial year:

• Up to INR 20,000 crore: 10% of annual consolidated turnover
• Above INR 20,000 crore and up to INR 40,000 crore: INR 2,000 crore plus 5% of the turnover exceeding INR 20,000 crore
• Above INR 40,000 crore: INR 3,000 crore plus 2.5% of the turnover exceeding INR 40,000 crore, subject to an overall ceiling of INR 5,000 crore

Who Qualifies as a Related Party Under Indian Law

Companies Act Definition (Section 2(76))

Under the Companies Act, 2013, a related party includes directors and their relatives, key managerial personnel (KMP) and their relatives, firms or companies in which a director or KMP holds significant interest, holding companies, subsidiaries, associate companies, and fellow subsidiaries. The definition also covers any body corporate whose board, managing director, or manager acts in accordance with the advice, directions, or instructions of a director or manager of the company.

SEBI's Expanded Definition for Listed Entities

SEBI's definition is significantly broader. From 1 April 2022, any person or entity forming part of the promoter or promoter group — regardless of shareholding — is a related party. Separately, a person or entity holding equity shares of 20% or more became a related party from 1 April 2022, and the trigger dropped to 10% or more from 1 April 2023 (Regulation 2(1)(zb)). The holding is tested directly or on a beneficial-interest basis, at any time during the immediately preceding financial year.

Critically, since April 2023, an RPT also includes transactions by a listed entity or its subsidiary with any third party that has the purpose and effect of benefiting a related party. This "look-through" provision means foreign parent companies must evaluate whether any transaction with an apparently unrelated party could indirectly benefit a promoter or significant shareholder.

Types of Transactions Covered Under Section 188

Section 188 of the Companies Act covers the following categories of transactions with related parties that require board approval:

• Sale, purchase, or supply of goods or materials
• Selling or disposing of, or buying, property of any kind
• Leasing of property of any kind
• Availing or rendering of any services
• Appointment of related parties to any office or place of profit in the company, subsidiary, or associate
• Underwriting the subscription of securities or derivatives
• Related party's appointment as an agent for purchase or sale of goods, materials, services, or property

For foreign subsidiaries in India, the most common RPTs involve inter-company service agreements, management fees, transfer pricing arrangements for goods and services, and technology licensing fees paid to the parent company. Each of these must pass through the prescribed approval framework.

The Dual Approval Framework: Board, Audit Committee, and Shareholders

Step 1: Board Approval Under Companies Act

All RPTs listed under Section 188(1) must be approved by the Board of Directors through a resolution at a board meeting. Circular resolutions are explicitly not permitted for RPT approvals. The interested director must abstain from both discussion and voting. For private companies (including most wholly-owned subsidiaries of foreign companies), board approval is the primary requirement unless the transaction exceeds prescribed thresholds.

Step 2: Shareholder Approval Under Companies Act

Shareholder approval via ordinary resolution is required when the transaction exceeds the following thresholds specified in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014:

Two exemptions matter for foreign-owned structures. First, the proviso to Rule 15(3) disapplies the shareholder-resolution requirement for transactions between a holding company and its wholly-owned subsidiary whose accounts are consolidated and placed before the holding company's shareholders. Second, MCA Notification G.S.R. 464(E) of 5 June 2015 disapplies the second proviso to Section 188(1) to private companies, so in a private company a related-party member is not barred from voting on the resolution.

Step 3: Audit Committee Approval Under SEBI LODR (Listed Entities)

For listed entities, Regulation 23 of the LODR Regulations adds a mandatory layer: all RPTs must be pre-approved by the audit committee, regardless of value. Under the proviso to Regulation 23(2), only those members of the audit committee who are independent directors may approve an RPT. The committee reviews minimum prescribed information including transaction rationale, arm's length justification, CEO/CFO certificates, and valuation reports where applicable.

Step 4: Shareholder Approval Under SEBI LODR (Material RPTs)

All material RPTs require shareholder consent via ordinary resolution, and the related party cannot vote on it. Until the Fifth Amendment Regulations, materiality was a single flat test — INR 1,000 crore or 10% of annual consolidated turnover, whichever was lower. From 19 November 2025 the test is graded by the listed entity's turnover under the new Schedule XIII, so that smaller listed entities are measured on a percentage of turnover while the largest are measured against an absolute ceiling of INR 5,000 crore. There is no longer one number that answers the question for every issuer — identify your turnover band first.

Schedule XIII sets the following bands, measured on the listed entity’s annual consolidated turnover for the immediately preceding financial year:

• Up to INR 20,000 crore: 10% of annual consolidated turnover
• Above INR 20,000 crore and up to INR 40,000 crore: INR 2,000 crore plus 5% of the turnover exceeding INR 20,000 crore
• Above INR 40,000 crore: INR 3,000 crore plus 2.5% of the turnover exceeding INR 40,000 crore, subject to an overall ceiling of INR 5,000 crore

Key 2025 SEBI Amendments: What Changed

Fifth Amendment Regulations (November 2025)

Following SEBI's board meeting on September 12, 2025, several significant changes were notified:

• Graded materiality: the flat INR 1,000 crore / 10%-of-turnover test was replaced by turnover-linked bands in a new Schedule XIII, raising the effective threshold for the largest issuers
• De minimis relief from the information pack: low-value RPTs no longer have to carry the full minimum-information package before the audit committee, subject to the thresholds set in the amended regulation
• Retail purchase exemption: purchases by directors, employees and KMPs from the listed entity on terms uniformly applicable to all, without establishing a business relationship, are not treated as RPTs

The rupee figures in each of these limbs sit in the amended Regulation 23 and Schedule XIII. Read them there — several widely circulated summaries of the September 2025 board meeting quote figures that did not survive into the notified text.

Industry Standards on Minimum Information for RPTs

SEBI, through the Industry Standards Forum (ISF), has mandated a standardized information format for audit committee and shareholder review of RPTs. Listed entities must provide comments against each information item, CEO/CFO/KMP certificates, and copies of valuation reports. The audit committee may record its rationale for not approving an RPT in its minutes.

Omnibus Approvals and Annual Review Process

How Omnibus Approvals Work

Given the volume of intercompany transactions in multinational corporate structures, the LODR Regulations permit the audit committee of a listed entity to grant omnibus approval for RPTs that are repetitive in nature. Unlisted companies that are required to constitute an audit committee under Section 177 have an equivalent route in Rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014 — a point worth noting, because most foreign-owned Indian subsidiaries are unlisted and the LODR omnibus mechanism does not reach them. Omnibus approval is particularly relevant for subsidiaries that have recurring management fee arrangements, regular goods supply contracts, or ongoing service agreements with their parent companies. The omnibus approval must specify the name of the related party, nature and duration of the transaction, maximum value per transaction, and the maximum aggregate value for the financial year.

Conditions for Omnibus Approval

The audit committee must satisfy itself that the following conditions are met before granting omnibus approval: the transaction must be in the ordinary course of business, the transaction must be at arm's length, the need for omnibus approval must be unavoidable (e.g., due to the repetitive or urgent nature of the transaction), and the committee must review the approved transactions on a quarterly basis. The omnibus approval is valid for one financial year and must be renewed annually with fresh review of terms and pricing.

Annual Disclosure Obligations

Every company must disclose RPTs in its Board's Report using Form AOC-2, which details the nature of the transaction, the related party involved, the duration and value of the contract, and the date of approval by the board or shareholders. Listed entities have additional disclosure obligations including half-yearly reporting to stock exchanges in the prescribed format, disclosure in corporate governance reports, and reporting through the BSE and NSE listing compliance portals. Failure to make timely disclosures is separately penalized and can trigger regulatory scrutiny even if the underlying transaction had proper approvals.

Arm's Length Pricing and Transfer Pricing Overlap

The arm's length requirement creates a direct intersection between RPT compliance and transfer pricing regulations. Under Section 188, transactions conducted in the ordinary course of business and at arm's length are exempt from approval requirements. However, proving arm's length pricing requires robust transfer pricing documentation.

For foreign parent companies transacting with Indian subsidiaries, the arm's length pricing must satisfy both the RPT framework and the transfer pricing provisions of the Income-tax Act, 2025 — sections 161 to 173, which carry forward sections 92 to 92F of the Income-tax Act, 1961 (the 1961 provisions continue to govern tax years beginning before 1 April 2026). Common methods include Comparable Uncontrolled Price (CUP), Transactional Net Margin Method (TNMM), and Profit Split Method. The transfer pricing study should be completed before the RPT is placed before the board or audit committee for approval.

Foreign companies should note that India's tax authorities have been increasingly aggressive in transfer pricing audits. Maintaining contemporaneous documentation and obtaining advance pricing agreements for significant intercompany transactions is strongly advisable. Read our detailed guide on 7 red flags that trigger transfer pricing audits.

Subsidiary-Level RPTs: The Cascading Approval Requirement

One of the most complex aspects of India's RPT framework involves transactions at the subsidiary level. Under Regulation 23(2), an RPT to which a subsidiary of a listed entity is a party — but the listed entity itself is not — needs prior approval of the listed entity's audit committee once its value crosses the prescribed threshold. That threshold is measured against the listed entity's annual consolidated turnover, not the subsidiary's own standalone turnover; the sub-regulation has been amended more than once since 2022, so read the current text before applying a percentage. For foreign-invested companies that are subsidiaries of listed overseas entities, this creates a cascading compliance obligation. The Indian subsidiary's board approves under Section 188, while the parent entity's audit committee must also approve under Regulation 23 if applicable thresholds are met.

Penalties for Non-Compliance

Companies Act Penalties

Violation of Section 188 carries the following consequences:

• Listed companies: Penalty of INR 25 lakh on the director or employee who enters into or authorizes the transaction
• Unlisted companies: Penalty of INR 5 lakh per instance
• Voidable transactions: The Board may void contracts entered without proper approval
• Indemnification obligation: If the transaction is not ratified within three months, the director or related party must indemnify the company against any resulting loss

SEBI Penalties

SEBI can impose penalties under the LODR Regulations for non-compliance with Regulation 23, including monetary fines, restrictions on market access, and in severe cases, debarment of directors from accessing the securities market. SEBI has also been issuing show-cause notices for failure to disclose RPTs in the prescribed format and for conducting RPTs without obtaining necessary approvals.

RPTs in Joint Ventures and Associate Companies

Foreign companies often enter India through joint ventures (JVs) rather than wholly-owned subsidiaries. JV structures create additional RPT complexity because transactions between the JV company and either partner (or the partner's group entities) are RPTs requiring board and potentially shareholder approval. In a public company, the second proviso to Section 188(1) bars a related-party member from voting on the approving resolution, which leaves the approval effectively in the hands of the non-interested partner. Foreign investors should not assume that protection in a private company: MCA Notification G.S.R. 464(E) of 5 June 2015 disapplies that proviso to private companies, and most Indian JVs are private limited. If the protection matters to you, write it into the shareholders' agreement and the articles rather than relying on Section 188.

In associate company relationships — under Section 2(6), a company in which another has significant influence, meaning control of at least 20% of total voting power or of business decisions under an agreement, without it being a subsidiary — transactions between the associate and the investing company are also RPTs. Foreign companies with portfolio investments in Indian companies above the 20% threshold should establish monitoring protocols to ensure RPT compliance at the investee level, as failures can create liability exposure for directors nominated by the foreign investor.

Practical Compliance Checklist for Foreign Companies

For foreign companies with Indian operations, maintaining RPT compliance requires a structured approach:

1. Identify all related parties: Map every entity in the promoter group, significant shareholders (above 10%), and all KMPs and their relatives across the Indian entity and its parent structure
2. Catalog all intercompany transactions: Document every management fee, service charge, royalty, ECB, technology license, and goods transfer between the parent and Indian entity
3. Assess arm's length pricing: Prepare transfer pricing studies for all material intercompany transactions before seeking board approval
4. Obtain board approval: Place each RPT before the board at a properly convened meeting (not via circular resolution), ensuring interested directors abstain
5. Seek audit committee approval (if listed): Present the prescribed minimum information to the audit committee before executing the transaction
6. Check materiality thresholds: Determine whether shareholder approval is required under both the Companies Act and SEBI LODR
7. File required disclosures: Report RPTs in the Board's Report (Form AOC-2), half-yearly disclosures to stock exchanges (for listed entities), and in the annual return
8. Maintain documentation: Keep books of account and related vouchers for at least eight financial years (Section 128(5)); minutes books of board and general meetings are kept permanently. Retain audit committee approvals, valuation reports and transfer pricing studies alongside them

Companies looking for expert guidance on RPT compliance can explore our annual compliance services and FEMA/RBI compliance support.

Common Mistakes Foreign Companies Make with RPTs

Based on regulatory actions and statutory audit findings, the following are the most frequently observed RPT compliance failures by foreign-invested companies in India:

• Failing to identify indirect RPTs: The "purpose and effect" test under SEBI means transactions with third-party vendors who channel benefits to related parties are also RPTs
• Using circular resolutions: Board approvals for RPTs must be at a meeting; circular resolutions are void for this purpose
• Not updating the related party register: Changes in shareholding, new KMP appointments, or promoter group restructuring must trigger an immediate update
• Ignoring subsidiary-level cascading approvals: Transactions between a subsidiary and a related party of the listed parent require the parent's audit committee approval
• Inadequate arm's length documentation: Simply stating a transaction is at arm's length is insufficient; contemporaneous transfer pricing documentation is required
• Missing disclosure deadlines: Half-yearly RPT disclosures to stock exchanges have strict timelines, and late filings attract penalties

Key Takeaways

• India's RPT framework is a dual regime: Companies Act Section 188 for all companies, plus SEBI LODR Regulation 23 for listed entities, with overlapping approval requirements
• SEBI's Fifth Amendment Regulations of 19 November 2025 replaced the flat INR 1,000 crore / 10%-of-turnover materiality test with turnover-linked bands in a new Schedule XIII — 10% of consolidated turnover up to INR 20,000 crore; INR 2,000 crore plus 5% of the excess between INR 20,000 crore and INR 40,000 crore; and INR 3,000 crore plus 2.5% of the excess above INR 40,000 crore, capped at INR 5,000 crore — and added de minimis relief for small transactions
• The expanded definition of related party now covers the entire promoter group regardless of shareholding, and transactions that indirectly benefit related parties
• Arm's length pricing must be supported by robust transfer pricing documentation that satisfies both RPT and income tax requirements
• Non-compliance penalties range from INR 5 lakh to INR 25 lakh per director, plus the risk of transactions being voided and SEBI enforcement action