From today, listed firms must provide granular disclosures for related party transactions

From Today, companies required to share more and clear information for approval of related party transactions

Starting today, nearly 5,000 listed companies will be required to follow a new set of rules issued by the Securities and Exchange Board of India (Sebi) for approval of related party transactions (RPTs). The framework, which becomes effective September 1, is aimed at bringing greater transparency and equipping shareholders with more detailed information to make informed decisions.

Related party transactions are business dealings between a company and entities that share a pre-existing relationship—such as subsidiaries, key management personnel, or major shareholders. These dealings often raise governance concerns if not adequately disclosed, as they may result in conflicts of interest or potential misuse of company resources.

In June this year, Sebi directed listed entities to adopt minimum disclosure standards as prescribed by the Industry Standards Forum (ISF), a body comprising representatives from industry chambers like FICCI, CII, and ASSOCHAM, working in collaboration with the regulator and stock exchanges. These standards mandate that companies share detailed information with audit committees and shareholders before seeking approval for RPT proposals.

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Greater clarity and explanatory statements

According to Makarand M Joshi, Founder of MMJC & Associates, “Explanatory statements for approving material RPTs need to be made more self-explanatory. It shall contain information, not only meeting but significantly exceeding the requirements of the Companies Act, 2013 viz. Data placed before audit committee, pricing methodology, certification from KMP, QR code for report of any etc.” He further noted that drafting such explanatory statements will now require far more diligence to enable better informed shareholder decision-making.

The ISF-prescribed format specifies that management must present details of related parties’ shareholding or contribution to profit and loss of the listed entity or its subsidiary, both directly and indirectly. Likewise, shareholding of the related party in the listed entity must also be disclosed.
In addition, information such as the financial performance of the related party, details of past transactions, and specifics of the proposed transaction—including nature, size, and rationale—must be clearly laid out.

Wide coverage of transactions

The new rules go beyond generic disclosures. For instance, transactions relating to loans, inter-corporate deposits, advances, or investments by the listed entity or its subsidiaries must now be accompanied by details of source of funds and rationale. Similarly, any proposed guarantee, indemnity, or comfort letter given by a company or subsidiary must be explained with the reasoning behind it.

If transactions involve borrowings, sale, lease, or disposal of assets of subsidiaries or units, then audit committees must also be provided with bidding details and information about bidders.
When it comes to royalty payments, the requirements are even more extensive. Companies will have to disclose the purpose of royalty paid during the last three years, break up payments made for brand use, technology know-how, professional or management fees, and compare royalty growth rates with growth in turnover, profit after tax, and dividends. Firms will also need to provide evidence of benefits derived from technology transfers and compare their royalty outgo with industry peers.

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Sebi’s study on royalty payments

Sebi had earlier conducted a comprehensive study of royalty payments across 233 listed companies between FY14 and FY23. The regulator found several instances where firms paid royalty to related parties exceeding 20% of their net profits. Alarmingly, even loss-making firms were making royalty pay-outs. The study revealed 1,538 instances of royalty payments falling below the 5% turnover approval threshold, while 185 cases involved loss-making companies paying a cumulative Rs 1,355 crore as royalty. Sebi observed that such practices raised questions on governance and shareholder value.

Certification to protect shareholders

Under the new framework, companies must also provide certifications from the CEO, CFO, or other key managerial personnel, and from every promoter-director, confirming that the proposed RPTs are not prejudicial to public shareholders. If any promoter-director fails to provide such certification, the fact must be disclosed to the audit committee and shareholders before approval.
Pavan Vijay, Founder, Corporate Professionals says, “The RPT Industry Standards enhance investor confidence by ensuring greater transparency and comparability in related party disclosures at the time of approval. Investors can now better assess the fairness of transactions involving promoters or key stakeholders, identify governance lapses and benchmark disclosures across companies and industries”. He further says, “Professionals should ensure consistency with the structured format specified in Para 4 of the RPT Industry Standards, clearly disclose transaction terms, avoid vague or incomplete information and provide valuation or other external reports to the Audit Committee and shareholders (through a QR code or web-link), among other requirements”.

Anjali Malhotra, Partner- Regulatory, Nangia Andersen LLP  says, "The requirement to have standardized formats for approval of RPT’s emerged due to precedents wherein funds were diverted through related parties for personal use and information was camouflaged which could have enabled the audit committee o or shareholders to judiciously accord their approvals. The historic examples depict how gaps in transparency can disrupt stakeholders trust, threat business continuity and invite regulatory actions".

Transparency and compliance

The regulator had initially set July 1, 2025, as the effective date for the circular. However, based on industry feedback, the implementation was deferred to September 1 to allow companies more time to align their systems and processes.

With the new rules now coming into force, experts believe Indian capital markets are poised to see stronger governance practices. By ensuring that shareholders receive more granular information, Sebi aims to reduce opacity in related party dealings and enhance investor confidence.

Additionally, Sebi has proposed easing related party transaction rules by raising shareholder approval threshold to Rs 5,000 crore and waiving disclosures for deals below Rs 15 crore. The consultation paper issued last month proposes to simplify compliance, boost transparency, and strengthen corporate governance norms.