Compliance Perspective on Voting by Promoters in Related Party Transactions

Related Party Transactions (RPTs) are subject to robust regulatory oversight under Indian corporate law, aimed at fostering transparency, preventing conflicts of interest, and safeguarding the interests of minority shareholders. Both the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) set out a comprehensive framework for the identification and governance of such transactions.

Regulation 2(1)(zb) of the Listing Regulations defines a “related party” to include those covered under Section 2(76) of the Companies Act, 2013 or under the applicable accounting standards. The Regulation further provides that:

(a) “any person or entity forming a part of the promoter or promoter group of the listed entity; or
(b) any person or any entity, holding equity shares: (i) of twenty per cent or more; or (ii) of ten per cent or more, with effect from April 1, 2023, in the listed entity either directly or on a beneficial interest basis as provided under section 89 of the Companies Act, 2013, at any time, during the immediate preceding financial year; shall be deemed to be a related party.”

This deeming fiction ensures that certain shareholders, including promoters and promoter group entities, are classified as related parties irrespective of their direct involvement in the transaction.

Section 188 of the Companies Act, 2013 governs specified transactions with related parties. The second proviso to Section 188(1) stipulates:

“no member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.”

Read in conjunction, these provisions categorically disqualify promoters, promoter group members, and significant shareholders (as defined) from voting on RPTs, thereby ensuring that such approvals are obtained from non-interested shareholders and reinforcing the governance standards expected of listed entities.