How to Prepare a Related Party Transaction Policy Under SEBI LODR Regulations

Kaustav Chowdhury
9 minutes ago
5 min read

Every listed entity in India must formulate a policy governing related party transactions (RPTs) as mandated by Regulation 23(1) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR). The policy defines what constitutes a related party, sets materiality thresholds, prescribes the approval mechanism through the audit committee and shareholders, and establishes ongoing monitoring and disclosure requirements. Getting the RPT policy right is critical because non-compliance can attract penalties from stock exchanges, SEBI enforcement action, and reputational damage. This guide provides a step-by-step approach to drafting and implementing an RPT policy that meets current regulatory expectations, including the revised Industry Standards on RPT disclosures issued by the Industry Standards Forum in June 2025.

Step 1: Understand the Regulatory Framework

The starting point for any RPT policy is a thorough understanding of the governing regulations. Regulation 23 of SEBI LODR is the primary provision, but it must be read alongside Section 188 of the Companies Act, 2013, the applicable Indian Accounting Standards (Ind AS 24 on Related Party Disclosures), and SEBI circulars and master circulars issued from time to time. The SEBI Master Circular dated 11 November 2024 consolidates all prior circulars on RPTs into a single reference document and should form the regulatory baseline for your policy.

The policy must also account for the expanded definition of 'related party' under SEBI LODR, which goes beyond Section 2(76) of the Companies Act, 2013. Under Regulation 2(1)(zb), a related party includes any person or entity belonging to the promoter or promoter group that holds 20% or more of the equity in the listed entity, along with any entity in which the listed entity holds 20% or more during the preceding financial year. Your policy should clearly incorporate both the Companies Act and the SEBI expanded definitions to ensure complete coverage.

Step 2: Define Related Parties and Categorise Transaction Types

The RPT policy must contain a clear, standalone definition section that lists all categories of related parties. These include directors and key managerial personnel (KMP), their relatives as defined under Section 2(77) of the Companies Act 2013, entities in which directors or KMP hold significant influence, subsidiary and associate companies, and any person forming part of the promoter group. The policy should also identify the types of transactions covered, including sale and purchase of goods, rendering or availing of services, leasing of property, lending or borrowing, appointment of agents, and transfer of resources or obligations.

For each category, the policy should specify whether the transaction falls under the ordinary course of business and whether it is at arm's length. This classification is important because Regulation 23(5) provides exemptions for transactions in the ordinary course of business and at arm's length, though the exemption does not apply to material RPTs requiring shareholder approval. The policy should include a process for management to certify whether a proposed RPT meets the ordinary course and arm's length tests before seeking audit committee approval.

Step 3: Set the Materiality Threshold

Regulation 23(1) requires the RPT policy to include a clear materiality threshold. A transaction with a related party is considered material if the transaction or transactions to be entered into, individually or taken together with previous transactions during a financial year, exceed Rs 1,000 crore or 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements, whichever is lower. Your policy must reproduce this threshold and specify that material RPTs require prior approval of shareholders through an ordinary resolution, with no related party permitted to vote on the resolution regardless of whether they are a party to the particular transaction.

The policy should also address the omnibus approval mechanism under Regulation 23(3). The audit committee may grant omnibus approval for RPTs that are repetitive in nature, subject to conditions including specification of the name of the related party, nature and duration of the transaction, maximum value, and the indicative base price or formula for arriving at the price. The audit committee must review all omnibus approvals on a quarterly basis and verify that actual transactions remain within the approved parameters.

Step 4: Establish the Approval and Review Mechanism

The RPT policy must set out a tiered approval framework. At the first level, all RPTs and subsequent material modifications require prior approval of the audit committee, where only independent directors on the committee participate in the approval process. At the second level, material RPTs require shareholder approval. The policy should detail the information that must be placed before the audit committee, aligned with the revised Industry Standards on minimum information for RPT review. This includes the nature and terms of the transaction, the rationale and business justification, pricing methodology, comparable market rates, and the potential impact on the company's financial position.

The policy must also require periodic review. The audit committee should review all RPTs at least on a quarterly basis, and the board should review the overall RPT policy at least once a year. For High Value Debt Listed Entities (HVDLEs), the policy must additionally require that material RPTs obtain a No Objection Certificate from the Debenture Trustee, who in turn must seek a certificate from unrelated debenture holders. Any deviation or non-compliance should be reported to the board immediately and disclosed to the stock exchanges as required.

Step 5: Create Monitoring, Disclosure, and Archiving Procedures

The RPT policy must address how the company will monitor ongoing RPTs. This includes maintaining a centralised register of all RPTs, requiring business units to report proposed RPTs through a standardised request form before entering into any transaction, and establishing a process for tracking cumulative transaction values to determine when the materiality threshold is breached. The company secretary or compliance officer should be designated as the nodal officer responsible for RPT monitoring and for coordinating information flow between business units, the audit committee, and the board.

Disclosure obligations under the RPT policy cover multiple channels. The policy itself must be published on the company's website under Regulation 46. Details of all material RPTs must be disclosed in the annual report in the prescribed format. Half-yearly disclosures of RPTs on a consolidated basis must be submitted to the stock exchanges. The policy should also specify document retention periods and require that all records relating to RPT approvals, audit committee minutes, and shareholder resolutions be preserved for a minimum of eight years in accordance with the company's document retention policy.

Key Compliance Points and Common Mistakes

Failing to use the expanded SEBI definition of related party, which is broader than the Companies Act definition, and missing transactions with promoter group entities holding 20% or more equity
Not tracking cumulative transaction values throughout the year, which can result in the materiality threshold being breached without timely shareholder approval
Granting omnibus approval without specifying the maximum value, duration, or pricing formula, which renders the approval non-compliant with Regulation 23(3)
Allowing interested directors or non-independent members to participate in audit committee deliberations on RPT approvals, violating the independence requirement
Not updating the RPT policy on the company website after board-approved amendments, which violates Regulation 46 disclosure requirements
Treating the ordinary course and arm's length exemption as a blanket waiver from all approval requirements, when it only exempts certain transactions from shareholder approval under Regulation 23(5)