Related Party Transactions Policy: From Compliance Checklist to Governance Tool

Related Party Transactions

Who is a Related Party?

Under Companies Act, 2013 [Section 2(76)]:

A related party includes:

• Directors and their relatives
• Key Managerial Personnel (KMP) and their relatives
• Holding, subsidiary and associate companies
• Fellow subsidiaries
• Bodies corporate in which directors/KMP have significant influence
• Firms in which directors or their relatives are partners
• Any person or entity prescribed under law.

Under SEBI LODR

The definition is broader and includes:

• Promoters and promoter group entities
• Persons/entities forming part of the listed entity’s related party framework under applicable accounting standards
• Transactions involving subsidiaries and related parties of subsidiaries

Related Party Transactions [RTP] Policy: Drafting Around the 2025 Tightening

Related party transactions are one of those governance areas that look simple in theory and become messy in practice, expeditiously. A company may think it is only dealing with a vendor, a promoter group entity, or a group subsidiary. But once the transaction is examined through SEBI’s lens, the real questions begin: Is this a related party? Is the transaction in the ordinary course of business? Is it on arm’s-length terms? Does it require Audit Committee approval, shareholder approval, or both? And has the company documented enough to defend the decision later? SEBI’s 2025 circulars show that the direction of travel is toward more detail, not less.

Why the 2025 tightening matters

The current framework already has a clear spine. Decision-makers are better equipped to evaluate whether the transaction is genuinely in the company’s interest. Under SEBI LODR, all related party transactions require prior Audit Committee approval, and material RPTs and material modifications require shareholder approval with related parties abstaining from the vote. Promoters cannot approve their own transactions using their voting power, ensuring that independent shareholders have a meaningful say.  The Companies Act also sits in the background with section 177 and section 188, which together anchor the governance and approval discipline.

What changed in 2025 is the level of scrutiny around what gets placed before the audit committee and shareholders. SEBI issued industry standards on 26 June 2025 for the minimum information to be provided, then followed that with an August 2025 consultation paper on further amendments, and then a 13 October 2025 circular again focused on the minimum information to be provided for approval. That sequence matters because it signals a regulatory preference for fuller papers, sharper justification, and less reliance on generic board notes.

For founders and CFOs, the message is practical: the policy must now work as an operating manual. It should not just say “transactions will be approved as per law.” It should tell the team what evidence is needed, who reviews it, what happens when the transaction is recurring, and how escalation works when the counterparty is connected to promoters, directors, or their relatives.

Start with the right definition, not the right template

A common mistake in drafting a Related Party Transaction (RPT) Policy is relying on a generic template that appears legally compliant but lacks operational clarity. Under SEBI’s LODR Regulations, an RPT includes any transfer of resources, services, or obligations between a listed entity and a related party, whether or not consideration is involved. Accordingly, the policy should adopt the definitions prescribed under Section 2(76) of the Companies Act, 2013, applicable accounting standards, and SEBI regulations, covering directors, KMPs, relatives, holding and subsidiary companies, and other connected entities. In practice, transactions such as consulting arrangements with promoter-linked entities, software licenses from group companies, corporate guarantees, and lease arrangements may all qualify as RPTs. A policy focused only on the sale or purchase of goods risks overlooking areas where governance and compliance risks are often most significant.

Build the approval path into the policy

A strong policy should map the approval path in plain language. First, management should test whether the transaction is a related party transaction at all. Next, it should assess whether the transaction is in the ordinary course of business and on arm’s-length terms. Then it should determine whether audit committee approval is required, whether omnibus approval is available, and whether shareholder approval is needed because the transaction is material. That sequence follows the structure of SEBI’s regulations and the Companies Act.

Omnibus approval is useful for repetitive transactions, but it is not a blank cheque. Section 177 permits omnibus approval subject to conditions, and SEBI’s framework expects the audit committee to review the details of transactions entered into pursuant to those omnibus approvals. Earlier SEBI amendments also made the time limit for omnibus approvals explicit, with approval not exceeding one year. For a growing business, this means the policy should specify when omnibus approval can be used, what limits apply, and what periodic reporting is required.

This is where many policies become pliable. They say recurring transactions may be approved by the audit committee, but they do not say who prepares the annual omnibus schedule, how prior year transactions are compared with the current year, or when a small increase becomes a material modification. A policy that leaves those issues to informal judgment will feel flexible until the first serious audit or shareholder question arrives.

Documentation is now part of the control

The 2025 SEBI tightening is really about documentation discipline. The June 2025 industry standards and the October 2025 circular both focus on the minimum information to be provided to the audit committee and shareholders. That tells us SEBI is not satisfied with one-line approvals or broad summaries. The regulator wants decision-makers to see enough context to assess substance, not just form.

In practical terms, the papers should include the nature of the relationship, the transaction size, the commercial rationale, the pricing basis, comparable market evidence where relevant, the impact on the financial statements, and the justification for any exception. The policy should require this information before the matter reaches the audit committee, because the quality of the approval depends on the quality of the inputs. That is a practical inference from SEBI’s 2025 standards and consultation paper.

For Board Members and Independent Directors, this is not a technicality. The Companies Act expects the audit committee and Independent Directors to play an active role in monitoring the mechanism. A policy that is not backed by management reporting, periodic review, and minutes that show real discussion will be weak in any regulatory or diligence review.

The founder mistake: treating policy as a legal shield

Founders often assume a policy is there to protect the company if something goes wrong. In reality, a poor policy can become part of the problem. If the policy is vague, the company may approve a transaction without the right paperwork, under the wrong approval route, or with no evidence that pricing and terms were examined properly. That is exactly the kind of governance lapse that attracts attention in listed-company reviews.

A better way to think about the policy is as a pre-transaction filter. Before any related party arrangement is signed, the business should know whether the transaction is ordinary course, whether it is arm’s length, whether it crosses material thresholds, whether shareholder approval is needed, and whether interested persons must stay out of the vote. That is not paperwork for its own sake. It is the difference between disciplined governance and after-the-fact justification.

For SMEs scaling into listed structures, or promoters managing multiple group entities, this becomes especially important. Related party transactions often start as convenient internal solutions and later become reputational issues if the policy was too loose or approvals were not well documented. The policy should therefore be written for the company it is becoming, not just the company it is today. That is a practical inference from the current regulatory tightening.

What a good policy should do now?

A defensible related party transactions policy should do five things well:-

• Define related parties correctly & explicitly.
• Explain the approval path distinctly.
• Spell out what information management must place before the audit committee and shareholders.
• Provide a workable omnibus approval framework for repetitive transactions.
• Describe how material modifications, recusals, and periodic reviews will be handled.

The requirements are consistent with SEBI’s current LODR framework and the 2025 tightening around minimum information and approval discipline.

The companies that get this right usually do not have the longest policy; they have the lucid one.

The 2025 reforms signify a shift from a “compliance-based approval process” to a “substance-based governance review.”