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Bombay Chamber, Mumbai: Related Party Transactions (RPTs) are not inherently unethical business practices. Listed entities across industries engage in legitimate business transactions while adhering to the Listing Obligations and Disclosure Requirements (LODR) prescribed by the Securities and Exchange Board of India (SEBI). However, not all companies comply with both the letter and spirit of the law, and some have been misusing or abusing RPTs to benefit certain executives, individuals, or entities connected to the promoter group.
“One listed entity, which I will not name, engaged in numerous abusive related party transactions (RPTs) at the subsidiary level. This called for scrutiny and corrective measures by SEBI. During the process, the regulator discovered that some transactions, while not involving a related party as the counterparty, ultimately aimed to benefit a related party. Consequently, SEBI introduced a purpose and effect test from April 1, 2023, in the RPT regulatory architecture, particularly for listed companies,” said Bharat Vasani, Chairperson, Legal Affairs & IPR Committee, Bombay Chamber of Commerce & Industry and Senior Advisor – Corporate Laws at Cyril Amarchand Mangaldas. Vasani was speaking at a Related Party Transaction (RPT) seminar held recently by the Bombay Chamber of Commerce & Industry in Mumbai.
In December 2024, a listed company transferred its business-to-consumer (B2C) business to its chief executive officer, who was also the promoter’s son. This was seen as a related party transaction, prioritising personal gain over shareholder interests and raising concerns about governance and transparency. Eventually, the son had to fund the new venture on his own, with the listed entity retaining a minority stake in the new B2C venture.
Legal industry experts cited another incident of gross violation of RPT regulatory architecture by a listed company (name withheld). When the regulator summoned one of the independent directors in question, the person pleaded ignorance of the Companies Act and the LODR, claiming to be just a physiotherapist of the promoter.
There have been numerous instances of gross violations in the past, including one involving one of the country’s largest airlines, which is no longer in existence. The airline had inducted a famous Bollywood lyricist as a board member who had no understanding of corporate business practices. While one might believe there is a difference between a habitual defaulter and a one-time defaulter, it is an open secret that there is none.
Corporate counsels believe that SEBI’s definition of related party transactions is very fluid and has been complicated by merging the concepts of ‘related party’ and ‘conflict of interest.’ As a result, they no longer understand the difference between the two concepts.
“Related party is not a bad term but is perceived as such. I think it’s just the conflict of interest aspect that should be dealt with carefully and hence needs to be regulated,” said Rajendra Chopra, Company Secretary/Compliance Officer at Cipla. “If you look at the entire Tata Group, their various business verticals work with other group companies, and it’s actually seen as a strength of the organisation,” he added.
Chopra pointed out that the regulator (SEBI) looks at RPTs in isolation. For example, a subsidiary was misused by IL&FS, DHFL, or other listed entities, hence the need to cover subsidiaries. The regulator needs to understand that it was not the regulation but the enforcement that was the problem in most cases.
“The regulator isn’t addressing the fundamental issue. So rather than strengthening their enforcement, they strengthen the regulation, thus laying down further regulations. Now they have introduced the purpose and effect test, thereby expanding the definition of a related party transaction,” said Chopra, adding that despite such measures, the regulator will not be able to control the fraud that can happen tomorrow.
Legal industry experts are also of the view that the LODR has not been aptly drafted. It leaves a lot of ambiguities in interpreting everything. As per a senior corporate lawyer, despite persistent requests from trade bodies, SEBI has not yet released frequently asked questions for LODR, unlike for Prohibition of Insider Trading (PIT) Regulations. “FAQs for LODR would have resolved various interpretative issues,” the lawyer said.
(Write to us at legalipr@bombaychamber.com)
