Related Party Transactions (Regulation 23)

Related party transactions (RPTs) sit at the fault line of listed-company governance. A controlling shareholder who can route a company's cash, contracts and assets to entities he also controls has every incentive to do so on terms that favour himself at the expense of public investors. Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 is the principal answer to that risk. It does not prohibit dealings with insiders — commercial life would be impossible if it did — but it forces every such dealing through an audit committee dominated by independent directors, and pushes the largest of them to a vote of disinterested shareholders from which the related party must abstain. This chapter dissects Regulation 23 as it now stands after the far-reaching Fifth Amendment of November 2025, which replaced the flat ₹1,000 crore materiality ceiling with a turnover-linked sliding scale, and explains how it interlocks with Section 188 of the Companies Act, 2013.

Why related party transactions are regulated

The governance pathology that Regulation 23 addresses is sometimes called tunnelling — the extraction of value from a company by those who control it, through transactions that look like ordinary commerce but are in truth wealth transfers. A promoter may cause the listed entity to buy raw material from his private firm at inflated prices, lend to a group company at concessional rates, or licence its brand for a royalty that bears no relation to value received. Each such transaction is individually lawful; the harm lies in the terms and in the conflict of interest of those approving them.

Indian securities regulation responds not by banning these dealings but by imposing procedural insulation and disclosure. The logic is that a related party transaction approved by directors with no stake in it, voted on by shareholders who do not benefit from it, and disclosed to the market in detail, is far less likely to be abusive. Regulation 23 builds three concentric rings of scrutiny — audit committee approval for all RPTs, shareholder approval for material RPTs, and continuous disclosure — layered on top of the company-law regime in Section 188 of the Companies Act. Understanding the regulation begins with understanding who counts as a related party and what counts as a transaction with one; those definitional building blocks are developed in Introduction, Scope and Definitions.

Who is a "related party": Regulation 2(1)(zb)

Regulation 2(1)(zb) defines a related party by reference to two external sources and then widens the net with two SEBI-specific limbs. The base definition imports every person who is a related party under sub-section (76) of Section 2 of the Companies Act, 2013, or under the applicable accounting standards — principally Ind AS 24. Section 2(76) reaches directors and key managerial personnel and their relatives, firms and private companies in which they are interested, holding, subsidiary and associate companies, and persons on whose advice the board is accustomed to act. Ind AS 24 adds a control-and-significant-influence test that captures relationships the company-law list might miss.

To these, SEBI added its own deeming limbs. Any person or entity forming part of the promoter or promoter group is a related party irrespective of shareholding (effective 1 April 2022). And any person or entity holding equity shares of the listed entity, directly or on a beneficial-interest basis, at any time during the immediately preceding financial year, is a related party once the holding crosses a threshold — reduced in stages so that, from 1 April 2023, holding 10% or more suffices (it had earlier been 20%). The effect is to sweep substantial public shareholders, not merely insiders, into the regime. The definitional architecture is examined alongside the other interpretive provisions in Introduction, Scope and Definitions.

What is a "related party transaction": Regulation 2(1)(zc)

Regulation 2(1)(zc) defines an RPT as a transaction involving a transfer of resources, services or obligations between a listed entity or any of its subsidiaries on the one hand and a related party of the listed entity or any of its subsidiaries on the other — regardless of whether a price is charged. That last clause is significant: a gratuitous transfer, a guarantee given for no consideration, or a loan at nil interest is as much an RPT as an arm's-length sale.

The 2021 amendments, effective 1 April 2023, added a crucial anti-avoidance limb. An RPT now also includes a transaction between the listed entity (or its subsidiary) and any other person or entity — even an apparently unrelated counterparty — where the purpose and effect is to benefit a related party of the listed entity or its subsidiary. This closes the round-tripping loophole by which a payment routed through a nominally independent intermediary could escape scrutiny while ultimately enriching an insider. Certain dealings are expressly carved out of the definition — for instance, the issue of securities on a rights or bonus basis, payment of dividend, subdivision of shares, and corporate actions uniformly applicable to all shareholders — because they cannot, by their nature, prefer one related party over another.

Audit committee approval: Regulation 23(2)

Regulation 23(2) is the regulation's universal gate. All related party transactions, and all subsequent material modifications to them, require the prior approval of the audit committee — with no monetary threshold whatsoever. The deliberate breadth contrasts sharply with Section 188 of the Companies Act, which is triggered only for prescribed categories of contract above prescribed value limits. For a listed entity, even a trivial dealing with a related party must clear the committee first.

SEBI tightened this further by providing that only those members of the audit committee who are independent directors shall approve related party transactions and their material modifications. A related party who happens to sit on the committee, or any non-independent director, is disqualified from voting on the approval. This dovetails with the broader composition and powers of the committee discussed in Audit Committee, and reflects the regulator's premise that the integrity of RPT screening turns on the independence of those doing the screening. The committee must also be furnished with prescribed minimum information — valuations, justification, the terms and the related party's interest — standardised by the Industry Standards on RPTs that became mandatory from 1 September 2025.

Omnibus approval and its conditions: Regulation 23(3)

Requiring a fresh audit-committee meeting for every recurring trade-payable or routine intra-group invoice would be unworkable. Regulation 23(3) therefore permits the audit committee to grant omnibus approval for RPTs proposed to be entered into, subject to conditions designed to keep that blanket approval from becoming a blank cheque.

The committee must lay down criteria for granting omnibus approval in line with the entity's RPT policy, and the approval must specify the name of the related party, the nature and the maximum aggregate value of the transaction, the period, and the manner of determining pricing. Where the need for an RPT cannot be foreseen and these details are unavailable, the committee may grant omnibus approval subject to a per-transaction value ceiling (historically ₹1 crore). Crucially, omnibus approvals must be reviewed by the audit committee at least once a quarter as to the transactions actually entered into, and are valid only for one year — after the Fifth Amendment, omnibus approval at an annual general meeting runs from AGM to AGM, harmonising the audit committee and shareholder validity periods rather than forcing duplicate renewals. An RPT carrying omnibus approval still goes to shareholders if it is material on the thresholds discussed below.

Materiality: the 2025 scale-based test in Regulation 23(1)

The single most consequential change wrought by the SEBI (LODR) (Fifth Amendment) Regulations, 2025 — notified on 19 November 2025, with the Regulation 23 changes effective from 19 December 2025 — is the recasting of the materiality test. The pre-amendment test was a flat ceiling: an RPT was material if it, individually or together with prior transactions in the financial year, exceeded ₹1,000 crore or 10% of the annual consolidated turnover, whichever was lower. For India's largest companies the ₹1,000 crore cap meant that comparatively ordinary transactions repeatedly triggered shareholder votes, which SEBI came to regard as a disproportionate compliance burden.

The amendment, operationalised through the newly inserted Schedule XIII, replaces the flat cap with a turnover-linked sliding scale. For listed entities with annual consolidated turnover up to ₹20,000 crore, the threshold remains 10% of consolidated turnover. For turnover between ₹20,001 crore and ₹40,000 crore, the threshold is ₹2,000 crore plus 5% of the turnover exceeding ₹20,000 crore. For turnover above ₹40,000 crore, it is ₹3,000 crore plus 2.5% of the turnover exceeding ₹40,000 crore, the whole subject to an absolute upper ceiling of ₹5,000 crore. The architecture preserves the bite of the regime for smaller entities while relieving mega-caps; SEBI's own back-testing suggested the number of RPTs requiring shareholder votes among the top firms would fall sharply. For entities listed on the SME exchange, a separate, much lower threshold (the lower of ₹50 crore or 10% of consolidated turnover) applies.

Shareholder approval and the no-vote rule: Regulation 23(4)

An RPT that crosses the materiality threshold cannot proceed on audit-committee approval alone. Regulation 23(4) requires that all material RPTs, and material modifications to them, obtain the prior approval of shareholders — and that no related party shall vote to approve such resolutions, whether or not that particular related party is itself a party to the transaction in question.

This disinterested-shareholder rule is markedly stricter than the company-law position. Under the proviso to Section 188(1) of the Companies Act, only the interested related party member abstains, and the abstention requirement is itself disapplied where 90% or more of the members are relatives of promoters or related parties. Regulation 23(4) admits of no such relaxation: the entire body of related parties is excluded from the vote on every material RPT, so that approval rests with the public float. The practical consequence is that controlling shareholders cannot use their own votes to ratify dealings that benefit them — the very mischief the provision targets. The interaction of this rule with the equity-specific obligations is taken up in Specific Listing Obligations (Equity).

Transactions of subsidiaries: Regulation 23(2) proviso and 23(1A)

A recurring evasion strategy is to push abusive dealings down to a subsidiary, where they might escape the listed parent's governance net. SEBI plugged this by extending Regulation 23 to RPTs of subsidiaries. An RPT entered into by a subsidiary of the listed entity requires the prior approval of the audit committee of the listed parent where the value of the subsidiary's RPT, individually or in aggregate during a financial year, exceeds 10% of the annual consolidated turnover of the listed entity. A lower trigger applies to subsidiary RPTs exceeding 10% of the subsidiary's own standalone turnover, calibrated to the parent's audit-committee oversight.

The Fifth Amendment refined the subsidiary thresholds to track the new scale-based parent threshold and introduced an alternative measure for newly incorporated subsidiaries that lack audited financials — in their case materiality is tested against a percentage of the aggregate of paid-up share capital and securities premium, capable of certification by a chartered accountant. The point of these layered tests is that the listed entity remains accountable for value transfers occurring anywhere in its consolidated group, not merely at the parent level — a theme that connects to the disclosure obligations explored in Principles Governing Disclosures.

Exemptions: Regulation 23(5)

Regulation 23(5) carves out categories where the conflict the regulation targets is structurally absent or already regulated elsewhere. The audit-committee and shareholder-approval requirements of sub-regulations (2), (3) and (4) do not apply to transactions entered into between two government companies; and to transactions entered into between a holding company and its wholly-owned subsidiary whose accounts are consolidated with the holding company and placed before the shareholders at the general meeting for approval.

The wholly-owned-subsidiary carve-out rests on a simple insight: where the parent owns 100% of the subsidiary, there are no minority shareholders in the subsidiary to be prejudiced, and the consolidated accounts already bring the dealing before the parent's own shareholders. The exemption is therefore narrowly drawn — it disappears the moment any outside equity exists in the subsidiary, because at that point the protected minority reappears. A further proviso clarifies the position where the listed entity is not itself a party but its subsidiary is, dovetailing with the subsidiary thresholds above.

Brand royalties and special-category provisos

Brand and royalty payments to related parties have historically been a favoured channel for value extraction, because they are recurring, hard to value, and easy to inflate. SEBI accordingly subjected them to a lower, percentage-of-turnover materiality trigger. Payments made by a listed entity or its subsidiary to a related party towards brand usage or royalty are deemed material — and so require shareholder approval — if they exceed a small percentage (in the range of 2% to 5% across successive amendments) of the entity's annual consolidated turnover, a far tighter bar than the general scale-based threshold. The deliberately low ceiling reflects SEBI's view that royalty arrangements warrant heightened suspicion.

Other provisos refine the regime's edges: payments by way of remuneration to directors and key managerial personnel, sitting fees, and reimbursements that are already governed by the Companies Act framework are not re-litigated under Regulation 23; and corporate actions uniformly available to all shareholders fall outside the RPT definition altogether. Read together, these provisions show a regulator targeting the transactions most prone to abuse with the sharpest tools, while leaving routine, non-preferential dealings comparatively undisturbed.

Interface with Section 188 of the Companies Act, 2013

A listed company must satisfy both Regulation 23 and Section 188 of the Companies Act, 2013 simultaneously; neither displaces the other, and where they diverge the stricter applies. The two regimes differ in instructive ways. Section 188 bites only on enumerated categories of contract — sale, purchase or supply of goods, leasing of property, appointment to office or place of profit, and the like — and only above prescribed value thresholds, with board approval the baseline and shareholder (ordinary resolution) approval reserved for larger transactions. Regulation 23, by contrast, demands audit-committee approval for every RPT regardless of category or value, and pushes material RPTs to a disinterested shareholder vote.

The abstention rules diverge too. Section 188's proviso excludes only the interested member and is itself relaxed where the company is overwhelmingly held by related parties; Regulation 23(4) excludes all related parties from the vote with no such relaxation. Section 188 also exempts transactions entered into in the ordinary course of business at arm's length from its approval machinery — a carve-out Regulation 23 does not replicate at the audit-committee stage, where even ordinary-course arm's-length dealings need approval (typically via omnibus route). For an exam answer, the safe formulation is that Regulation 23 overlays a stricter, disclosure-heavy governance layer on the Section 188 base, and compliance with one does not excuse non-compliance with the other.

Enforcement: SEBI's principles-based scrutiny

SEBI has shown willingness to look past the formal materiality arithmetic to the substance of a dealing. In its order concerning Linde India Limited dated 24 July 2024, arising from agreements with Praxair India Private Limited following the global Linde–Praxair merger, the listed entity had argued that shareholder approval was unnecessary because the commercial transactions did not cross the 10% consolidated-turnover threshold then in force. SEBI's approach illustrated that it treats Regulation 23 as part of a broader, principles-based disclosure regime: where the structuring of a group reorganisation has the purpose and effect of benefiting related parties, the regulator scrutinises the arrangement as a whole rather than accepting a transaction-by-transaction slicing that keeps each piece below the line.

More generally, SEBI has characterised the concealment of fund diversion through inadequate RPT disclosure as a species of misleading the market and a violation of the LODR framework's disclosure principles — engaging not only Regulation 23 but the overarching obligation of accurate and timely disclosure under the principles in Principles Governing Disclosures. The anti-avoidance limb of Regulation 2(1)(zc) — capturing transactions whose purpose and effect is to benefit a related party even through a nominally unrelated counterparty — gives SEBI an explicit textual hook for this substance-over-form scrutiny.

Continuous disclosure of RPTs

Approval is only half the regime; disclosure is the other half. Regulation 23 requires the listed entity to submit to the stock exchanges disclosures of related party transactions on a consolidated basis, in the prescribed format, on the date of publication of its standalone and consolidated financial results — that is, on a half-yearly basis — and to publish the same on its website. High-value entities face an accelerated and more granular regime, and the format itself is standardised by the Industry Standards on RPTs.

These transaction-level disclosures sit within the wider continuous-disclosure architecture of the LODR Regulations, including the material-event reporting obligations and the annual report disclosures discussed in Common Obligations of Listed Entities. The cumulative effect is that the market receives a recurring, comparable picture of every channel through which the company deals with its insiders — which is, in the end, the precondition for shareholders being able to exercise the disinterested vote that Regulation 23(4) confers on them.

The role of the board and independent directors

Regulation 23 cannot function without the governance scaffolding that surrounds it. The independence of the audit committee — whose independent-director members alone may approve RPTs — depends on the board-composition rules requiring a stipulated proportion of independent directors and a properly constituted committee, examined in Board of Directors Composition. An audit committee captured by the controlling group would convert the Regulation 23(2) gate into a formality.

This is why SEBI's RPT reforms have travelled in lockstep with reforms to independent-director appointment, removal and tenure. The regulation assumes that independent directors, insulated from the promoter's influence, will bring genuine scepticism to the valuations and justifications placed before them, and that material RPTs, having survived that scrutiny, will then be tested again by a disinterested shareholder vote. The whole edifice — definition, audit-committee gate, omnibus discipline, materiality scale, shareholder vote, and disclosure — is designed so that no single locus of control can both initiate and unilaterally bless a transaction that enriches itself at the company's expense.