Treatment of Promoter Group in Related Party Transaction Approvals

Related party transactions (RPTs) are subject to heightened scrutiny under Indian corporate laws to ensure transparency, prevent conflicts of interest, and protect the interests of minority shareholders. Both the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) lay down detailed provisions governing such transactions.

Regulation 2(1)(zb) of the Listing Regulations defines “related party” as:

“related party” means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards:
Provided 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 provision ensures that even if a promoter or member of the promoter group is not directly involved in the transaction, they are still treated as related parties under the regulatory framework.

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

“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 together, these provisions make it clear that promoters and promoter group entities, by virtue of being deemed related parties, are disqualified from voting on resolutions that seek shareholder approval for related party transactions. This restriction plays a crucial role in ensuring that such resolutions are passed only with the consent of disinterested shareholders, thereby upholding the principles of good governance and fairness in corporate decision-making.