ENHANCING DISCLOSURE PRACTICES: THE INDIAN STANDARDS FORUM FORMULATES THE INDUSTRY STANDARDS OF DISCLOSURE REQUIREMENTS FOR RELATED PARTY TRANSACTIONS

Introduction

Related Party Transactions (“RPTs”) entail financial transactions between a company and entities with whom it shares an existing relationship such as directors, key managerial personnel, or their relatives. Transactions of this nature have long been the focus in corporate governance, with concern frequently raised over their possible misuse and conflicts of interest. Although the transactions are at times unavoidable for business purposes, they also carry the risk of conflict of interest, diversion of funds, and unjust benefits to promoters.

In cognizance of these risks, India has framed and continuously amended the legal and regulatory structure to regulate RPTs, mainly under the Companies Act, 2013 (“the Act”) and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), issued by the Securities and Exchange Board of India (“SEBI”). Nevertheless, in spite of repeated amendments and increased scrutiny, corporate governance lapses related to RPTs keep surfacing, which requires ongoing regulatory development.

1. SEBI’s Notification of Industry Standards for RPTs

On February 14, 2025, SEBI formally notified the adoption of the industry standards for compliance with Regulation 23(2), (3), and (4) of the LODR Regulations. These regulations mandate that RPTs be approved by the audit committee and by the shareholders if material. To ensure a uniform approach and assist listed entities in complying with these requirements the Industry Standards Forum (“ISF”) a collaborative body comprising ASSOCHAM, CII, and FICCI, working under the aegis of India’s stock exchanges (“ISF Standards”) has formulated minimum information standards in consultation with SEBI to streamline disclosure norms and ensure greater uniformity transparency, efficiency, and clarity in the disclosure of material events or information by listed entities to the audit committees and shareholders. These ISF Standards outline the information that must be provided to the audit committee and shareholders for reviewing and approving RPTs, as specified under Part A and Part B of Section III-B of SEBI’s Master Circular dated November 11, 2024.

Issued under Section 11(1) and 11A of the Securities and Exchange Board of India Act, 1992, along with Regulation 101 of LODR Regulations, the ISF Standards showcases SEBI’s commitment to strengthening corporate governance, investor confidence, and regulatory oversight in India’s capital markets. The ISF Standards shall come into operation from April 1, 2025, and any violation of the same shall amount to a breach of the SEBI Act, 1992, incurring penalties and enforcement actions as per regulatory provisions.

Key Features of the ISF Standards

The ISF Standards introduces a more stringent and comprehensive framework for RPTs, and sets minimum information standards for reviewing and approving RPTs by listed entities. While the objective is to enhance transparency and protect the interests of public shareholders, the ISF Standards also introduce stringent compliance measures that companies must follow.

1. Minimum Information Required for Audit Committee Review

To ensure informed decision-making, companies must provide their audit committees with extensive information on RPTs, including:

• Financial Performance of the Related Party: Companies must disclose details of the related party’s turnover, net worth, and profit/loss over the last three years. This helps assess the financial viability and fairness of the proposed transaction.
• Past Transactions with the Related Party: A complete history of previous transactions between the company and the related party must be provided, including their impact on the company’s financials.
• Certification by CEO, CFO, and Promoter-Directors: A new requirement mandates that key executives and promoter-directors certify that the transaction is not detrimental to public shareholders and is on fair commercial terms.
• External Valuation Reports: In cases where the transaction involves asset transfers, investments, or loans, an independent valuation report may be required to justify pricing.
• Justification for the Transaction: Companies must provide a clear rationale explaining why the RPT is necessary, along with details on how it benefits the company and its shareholders.

2. Standardized Format for Disclosure and Review

To ensure consistency and ease of review, ISF Standards has introduced a standardized format for disclosing RPTs. Key aspects include:

• Transaction Categorization: Clear distinction between listed entity transactions and those involving subsidiaries to ensure full transparency.
• Audit Committee Comments: The committee must explicitly record their assessment of transaction terms, pricing structure, and any potential conflict of interest.
• Comparative Benchmarking: For certain transactions like royalty payments, companies must compare their payments with those of industry peers and justify any deviation from standard practices.

3. Stricter Scrutiny for Specific RPT Types

Certain types of RPTs will now require additional disclosures and scrutiny:

• Sale, Purchase, or Supply of Goods/Services: If a company transacts with a related party for goods or services, it must provide details of the bidding process and justify why the related party was selected. If bids were not invited, the company must provide a valid reason.
• Loans, Guarantees, and Advances: Companies must disclose details of interest rates, repayment terms, the creditworthiness of the related party, and any potential risks involved. If the loan is at a lower interest rate than market standards, the audit committee must provide a justification.
• Royalty Payments: It requires a peer comparison of royalty rates and justifications for any deviation. Additionally, companies must disclose whether the royalty payments have increased over the years in comparison to the company’s profits and dividends.

4. Mandatory financial disclosures in shareholder notices

ISF Standards have introduced stricter disclosure norms for RPTs requiring shareholder approval. The explanatory statement in shareholder meeting notices must now include detailed financial information, such as:

• Transaction tenure, nature, and valuation basis
• Potential impact on the company’s financial position
• Independent assessment of whether the transaction is at arm’s length
• Comparative financial data from similar transactions

This measure ensures that shareholders have complete transparency when evaluating an RPT before approving it.

5. Increased Responsibilities for Audit Committees

Audit Committees now have an expanded role in scrutinizing RPTs. They are required to review detailed financial aspects of each transaction, including:

• Valuation reports and independent assessments,
• Fairness opinions on pricing and commercial terms,
• Impact of the transaction on the company’s financials, and
• Potential benefits (or risks) to related parties.

Additionally, audit committees must certify that the RPTs do not unfairly favour the promoter group at the cost of minority shareholders. This puts greater accountability on independent directors and strengthens internal checks against potential misuse of funds.

Implications and Recommendations

Although the ISF Standards is an important regulatory move that brings added transparency to RPTs a cause for concern is the added compliance load on listed firms, especially mid-sized and smaller ones. The need for standardized disclosures, third-party valuations, and enhanced audit committee approvals will not only increase operating expenses but also require enhancing internal governance systems. For example, a mid-sized manufacturing firm that continuously conducts RPTs for raw material purchases might now be required to give exhaustive financial reasons and third-party valuations, taking longer to obtain approvals and generating bureaucratic lags.

In order to reconcile regulatory intent with operational feasibility, SEBI should consider issuing further clarifications on materiality thresholds, disclosure formats, and confidentiality clauses. Some financial information, if disclosed in full in shareholder notices, could put companies at commercial risk or competitive disadvantage. Audit committees should also be given more flexibility in deciding whether an external valuation is needed for all transactions or only for high-value or non-routine RPTs.

Conclusion

The ISF Standards represents a landmark regulatory development, increasing RPTs transparency. As much as it attempts to curb abuse, its enforcement raises operational practical concerns such as enhanced compliance costs and regulatory overreach risks.

While the framework harmonizes India’s governance with international best practices and enhances investor protection, over-stringency could compel firms to opt for elaborate structuring to circumvent rules. Independent directors and audit committees, as crucial to monitoring, cannot function as enforcers unless equipped with suitable guidance and safe harbours.

SEBI has to balance regulation and business efficiency, providing minority shareholder protection without generating compliance costs that choke legitimate transactions. Whether this structure increases transparency or turns into an over-regulatory weight will be seen in the coming months.