Introduction
A promoter is, in general, a person or group of persons who collectively take up the responsibility of setting up a company from the very initial stage. Promoters are usually the ones who come up with the business idea, decide what the company should do and the necessary plan of action, and collect the resources needed to form the company. They may also bring other investors into the company to get the business started, and they contribute their own money alongside those investors.
Public listed companies obtain the greater part of their funds and capital from public investors, which may include retail investors as well as institutional investors, and this capital helps the company to expand and to grow its business operations. Public investors should have a say in the important decisions of the company, and they have a right to vote on important matters and on matters that affect their rights in the company.
The active participation of shareholders in the decision-making of the company ensures transparency and accountability.
When shareholders take an active role in how a company is run, it makes a real difference, not only to that one company but to how markets work overall. This means voting on important decisions, attending annual meetings, asking management difficult questions and having a say in matters such as executive pay or large mergers. When shareholders stay involved in this way, management is kept in check. Executives cannot simply make decisions that suit themselves, because they know that shareholders are watching and will hold them accountable. It also pushes companies to be more open: they have to share information clearly so that shareholders can make informed choices when they vote.
The result is simple: investors trust the company more. When people feel that their voice matters and can shape how a business is run, they feel safer putting their money into it. They are not worried that decisions are being made behind closed doors or only for the benefit of a few people at the top. When this kind of trust builds up across many companies, it strengthens the entire market. Share prices begin to reflect how a company is actually performing, rather than being driven by rumour or by fear of poor governance. Money flows more easily towards companies that are well run and transparent, and the market as a whole earns a reputation for fairness.
Shareholder participation is therefore not a mere formality that companies go through; it is what keeps businesses honest and keeps investors willing to trust them with their money. That trust is what keeps markets stable and growing in the long run.
A. Statement of the problem
Indian listed companies have rules for reviewing transactions with promoters and other connected parties, but it remains unclear whether these safeguards are strong enough to ensure effective corporate governance. When promoters have significant influence over company decisions, investors may find it difficult to judge whether related party transactions are fair and beneficial to the company. This research examines whether the existing legal framework adequately protects ordinary shareholders, promotes transparent decision-making, sustains trust in India’s capital markets and supports the productive use of the country’s resources.1
B. Hypothesis
If the promoters of a company provide accurate and detailed information to the shareholders about the related party transactions it enters into, the shareholders will have greater trust and confidence in the company’s decisions.
C. Research questions
Do India’s current rules protect ordinary shareholders when listed companies make payments to businesses connected to their promoters? Are these payments explained clearly enough for investors to understand what the company receives in return? Do large or poorly explained promoter-linked payments affect investors’ trust in a company?
D. Research methodology
This study uses a qualitative legal research method. It examines existing laws and regulations, along with published research and reports, to understand how India regulates transactions between listed companies and businesses connected to their promoters.
The study reviews the Companies Act, 2013, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and relevant SEBI circulars. It also examines academic studies and reports on promoter influence, related party transactions, shareholder protection and investor confidence.
E. Research gap
The legal framework for corporate governance and promoter-related transactions is already provided in the Companies Act, 2013 and the SEBI LODR Regulations, 2015, which keep a check on promoter-related transactions and make promoters accountable to the company and its shareholders. In practice, however, this framework is complied with on paper, while in some cases shareholders do not receive a detailed explanation of the reasoning behind a related party transaction. This leaves them in doubt, which ultimately affects investor confidence in the market, leading to reduced investment and a decline in the company’s health.
F. Literature review
Related party transactions are transactions entered into between a company and persons connected or related to it. Related parties may include the promoters, directors and managers of the company, their family members, and the companies they control.2
Such transactions may involve the buying and selling of goods and services, or the borrowing or lending of money. Examples of related party transactions include the following:
• A company buys goods from a business owned by its promoter.
• A company sells products to another company controlled by its promoter.
• A company pays rent for a building owned by a director or the director’s family.
• A company pays a promoter-connected company to use its brand name.
• A company pays a related business for technology or software.
• A company hires a promoter’s family member as a consultant.
• A company pays management fees to another company in the same group.
• A company borrows money from a promoter or a related company.
• A company lends money to a promoter-connected business.
• A company guarantees a loan taken by a related company.
• A company buys land or equipment from a director-connected business.
• A company sells assets to a related company.
• A company shares staff or office services with another group company and pays for them.
• A company pays a director’s family business for advertising or marketing.
• A company enters into a joint project with a business controlled by its promoter.
Existing legal framework in India
A. Section 177: the audit committee
Under section 177 of the Companies Act, 2013, listed public companies and certain other prescribed classes of companies must constitute an audit committee, and the audit committee must approve related party transactions in advance.3
The committee has at least three directors, with independent directors forming a majority. It examines financial statements, reviews the auditors and internal controls, and approves or modifies related party transactions. It also scrutinises the company’s loans and investments. Listed companies and certain other prescribed companies must also provide a safe channel, a vigil mechanism, through which directors and employees can report concerns.4
B. Section 188: related party transactions
Section 188 of the Companies Act, 2013 lays down rules for certain contracts and arrangements between a company and persons or businesses related to it. These include the sale or purchase of goods or property, the leasing of property, the availing or rendering of services and the appointment of an agent for the purchase or sale of goods, materials, services or property. The company generally needs the consent of its Board of Directors before entering into such a transaction, and transactions that cross the prescribed thresholds also require approval by the shareholders by resolution. A member who is a related party cannot vote on that resolution. There are exceptions, including transactions entered into in the ordinary course of business on an arm’s length basis, and a transaction between a holding company and its wholly owned subsidiary is exempt from the shareholder-approval requirement if the stated conditions are met. Every such contract or arrangement must be referred to in the Board’s report to the shareholders, along with the justification for entering into it. If a transaction is made without the required approval and is not ratified by the Board or the shareholders within three months, it is voidable at the option of the Board or the shareholders. The company may also proceed against a director or employee who entered into the transaction in contravention of the section to recover any loss, and responsible directors may have to indemnify the company.5
C. Section 184: disclosure of interest by directors
Under section 184, a director must disclose his or her interest in any other body corporate or firm with which the company proposes to enter into a contract or arrangement. For example, if a director is a promoter or manager of the other company with which the company is going to transact, that interest must be disclosed, and the director must not participate in the Board’s consideration of that particular contract.6
D. Section 166: duties of directors
Section 166 requires directors to act in good faith and to make decisions in the best interests of the company as a whole. They must exercise due care and independent judgment, avoid situations in which their personal interests conflict with those of the company, and must not use their position to obtain an undue advantage. For example, a director should not favour a business he or she owns when the company chooses a supplier. A director who makes an undue gain is liable to pay an amount equal to that gain to the company. These duties apply equally to promoters when they serve as directors.7
E. Section 149: independent directors
Section 149 of the Companies Act, 2013 requires every listed public company to have at least one-third of its total number of directors as independent directors.8 These directors are expected to bring their own judgment to bear and not simply follow the promoters or the management. They can ask questions, examine important decisions and raise concerns when a transaction may favour a promoter-connected business over the company. This supports corporate governance by adding independent oversight and encouraging careful, balanced decisions. Independent directors alone, however, do not guarantee good governance; they must have the information and the freedom to carry out their role effectively.
F. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
Regulation 23 of the SEBI LODR Regulations requires the audit committee of a listed entity to approve related party transactions in advance, and only those members of the audit committee who are independent directors may approve them.9
The audit committee examines the purpose, nature and commercial terms of the transaction, and its financial aspects, before it is entered into. Material related party transactions require the prior approval of the shareholders, and no related party may vote to approve them. Listed entities must also disclose their related party transactions to the stock exchanges on a half-yearly basis.10
Dual nature of related party transactions
Related party transactions entered into with the right intention can serve as a genuine business booster. The company can benefit in terms of technology, staff, supply chains and property, and can reduce costs in certain transactions. Related party transactions can improve the operational efficiency of companies. The mere existence of a relationship between the parties does not make a transaction improper. On the other side of the coin, however, promoters who take advantage of their large shareholding may dominate the decision-making of the board and may enter into related party transactions that benefit their own interests, or the interests of the other party related to them.11 The real question is at what cost the transaction benefits the promoters or the related parties. Public retail investors rarely participate in the meetings of the company, and the minority shareholders hold a relatively small percentage of the shares, so their voice in the decision-making and voting of the company is suppressed. This can lead to the diversion of the company’s money and assets into areas that benefit solely the promoters, reducing the overall net worth of the company.
A. Selling assets at a low price
In some cases, the promoters of a listed company may sell its assets, such as land, a brand, shares or any other asset, for far less than their fair value. Transactions of this kind benefit the related parties of the promoters. The cost is borne by the company, which means ultimately by the retail investors.12
B. Buying assets at an inflated price
In other cases, the promoters may use shareholders’ funds to pay inflated prices for assets bought from related parties. The property purchased may be a business or intellectual property. In this way the promoters fill their own pockets, and the loss is suffered by shareholders who usually have little knowledge of how these transactions are actually conducted.
C. Paying excessive prices to suppliers
Promoters sometimes pay higher prices to related suppliers. Independent suppliers would usually charge less for the same supplies, but the company pays the related suppliers more than the true price. Again, the cost ultimately falls on the shareholders of the company, because the company’s profits are used to pay these excessive prices.
D. Selling products at a lower price
Promoters may cause the company to sell its products to related distributors at a low price, and the distributor then sells them at a relatively higher price. Again, this cost is levied on the profits of the company that should be available to its shareholders.
E. Interest-free loans
Promoters may cause the company to lend to related parties at little or no interest, at the cost of income that should again be available to the shareholders of the company.
F. Transfer of funds through subsidiaries
A listed company may send money to another company in its group. That company may pass the money on to a third company linked to the promoter. Each payment may look like a normal business transaction, so observers may not notice where the money finally went.
The problem is that the listed company may not receive fair value in return. If the money is lost or not repaid, the listed company’s investors share the loss, while the promoter’s other company may have received the benefit.13
Moving money between group companies is not always wrong. It becomes a concern when the real purpose is hidden, the transaction is unfair, or the company does not tell its shareholders enough. Suppose X gives ₹10 crore to Y, stating that Y needs it for business. Y then pays ₹9 crore to Z for “services”. The promoter controls Z, so Z now has the money. X did not pay Z directly, which can make the trail harder to follow, but the money came from X and ended up in the promoter’s company.
Royalty payments to related parties
In November 2024 SEBI published a study of royalty payments made by 233 listed companies to related parties over the ten financial years from 2013–14 to 2022–23. It focused on payments below 5 per cent of the company’s annual consolidated turnover, the level below which a royalty payment did not require approval by the minority shareholders under the applicable rule.14
A company sometimes pays a royalty to a related company for the use of its brand, technology or know-how. That can be a perfectly normal business cost. The real worry is that shareholders are not told enough to judge whether the company is getting fair value for what it pays, or whether the amount is reasonable.15
In 85 per cent of the instances in which profit-making companies paid royalty, the payment was no more than 2 per cent of turnover, which does not sound like much. Measured against profit, however, the picture is different. In roughly one out of every four instances, the royalty took away more than a fifth of the company’s net profit, and in 74 instances the company paid out more in royalty than it earned in profit at all.16
The study found 315 instances in which a company paid royalty but gave its shareholders no dividend at all, and in about a third of those the royalty exceeded a fifth of the company’s net profit. The money was therefore going out to a related company while the people who own the business received nothing.17
According to the study, 63 of the 233 companies reported a net loss in at least one year of the period. Across the 185 loss-making years of those companies, they still paid a combined ₹1,355 crore in royalty. Ten companies were in the red for five years or more, and even they paid ₹228 crore between them.18
This raises the question whether a company that is losing money should have to explain its royalty payments more clearly. To be fair, the figures do not show that the royalty caused the losses.
SEBI also observed that many companies were not forthcoming about their royalty payments. In plain terms, shareholders were often left guessing about a few basic things:19
• why the royalty was being paid at all, and how the rate was worked out;
• what it was actually for: a brand, technology or some other service;
• what the listed company received in return;
• how long the agreement or approval would run; and
• whether the amount was fair when set against similar payments, or against the company’s own sales and profits.
A. Other payments described differently
A company can pay money to a related company in different ways, and not all of them are called “royalty”. The same kind of payment might be labelled a management fee, a fee for the use of technology or a charge for some other service. Counting only the payments labelled “royalty” may therefore miss other payments that work in much the same way but go by a different name, and the real amount flowing to related companies may be larger than the royalty figures show.20 This is why it matters whether companies describe these payments clearly in their reports, and whether they describe them in a similar way, so that one company can fairly be compared with another. Without that, ordinary readers cannot easily tell how much a company is really paying its related companies, or whether the amount is fair.
How misuse of related party transactions weakens the company and, over time, the national economy
Entering into a related party transaction is not in itself a bad thing. A company may enter into such transactions in compliance with the rules laid down by the Companies Act, 2013 and the SEBI LODR Regulations, 2015, obtaining the consent of the Board, the approval of the shareholders where required and, most importantly, the approval of the audit committee. Abusive transactions, however, adversely affect the financial health of the company, then investors’ confidence in the company and ultimately the economy of the nation.
A. Chain of events
The chain of events that ultimately leads to economic loss for the nation is as follows:
• royalty or brand fees set higher than the real value of what is received;
• management or technology fees for services that are vague or hard to measure;
• loans to group companies at low interest, or never repaid;
• buying raw materials from, or selling products to, family firms at unfair prices; and
• guarantees given for group companies’ debts.
The income of the promoter family group either keeps increasing or stays the same. But the listed company, which is partly owned by ordinary investors, ends up poorer.
B. The public bears the cost
When a company pays out more than it should, its profit shrinks. A smaller profit means a smaller dividend, a lower share price, or both.
The promoter family loses nothing, since it receives the money through its other companies. The small investor who owns a few shares sees only weaker returns. Put simply, the family gains at both ends while outside shareholders absorb the loss. This is why the SEBI study’s finding matters: some companies paid royalty while paying no dividend, or paid royalty larger than their entire profit.
C. Gradual financial loss for the company
Once the company’s funds are drained through such related party transactions, the company eventually runs out of money for further growth, expansion and the establishment of new facilities. To keep running, it takes on more loans, which raises its interest burden. Lenders see weaker numbers and charge more. A company that is profitable on paper may not be as financially strong in reality, with profits being sent away faster than they are built.
D. Loss of investor confidence
When investors feel that company insiders may be gaining at their expense, they often become more cautious. They may buy the company’s shares only at a lower price, which makes it harder and more expensive for the company to raise money. Some may avoid investing altogether, while foreign investors may choose to put their money in countries where they feel their rights are better protected.
E. Impact on capital
Companies need money from investors and lenders to grow. When people stop trusting the system, that money becomes harder and more expensive to obtain.
Banks begin charging higher interest to cover the extra risk, or they simply lend less. Fewer people want to buy shares when a company goes public, so raising money through the stock market slows down. Even honest, well-run companies end up paying more for funds, because lenders and investors tend to lump them together with the weaker ones.
When borrowing costs more, fewer projects seem worth the risk. Some factories and expansions that would have created jobs never get started at all.
F. Impact on banks
Indian companies often borrow from banks. Sometimes a company’s money is quietly moved to other companies owned by the same family. When that happens, the company may be unable to repay the bank, and the bank takes the loss. A number of India’s past bad-loan problems have been traced to diversions of this kind.
When banks lose money on loans, they have to set more money aside and can lend less to others. A large part of India’s banking system is publicly owned, so it is often taxpayers who have to put money back into the banks. In the end, what one family gained can become a cost that ordinary people pay.
G. Impact on households
Many Indian families now put their money into mutual funds, systematic investment plans, insurance plans and pension funds. These funds, in turn, own shares in listed companies. If those companies are weakened by unfair dealings, ordinary savers feel it too.
Returns on these investments can fall, which hurts the savings that people are counting on for their children’s education or their retirement. Once people lose faith in market-linked savings, they may pull their money out and go back to options that earn little, such as keeping cash idle at home.
This matters for the country as well, because India’s growth increasingly relies on household savings being put to good use in businesses.
H. Growth, jobs and fair competition take a hit
When money goes where the promoter family wants instead of where the business makes the most sense, it ends up in the wrong places. Funds stay locked in companies that mainly serve insiders, while better-run businesses, especially smaller ones with no powerful backers, struggle to get the money they need to grow. As a result, businesses expand more slowly and become less productive, fewer new jobs are created, and less money is put back into improving products or trying new ideas. The government also collects less tax, because the profits companies report are lower than they would otherwise have been.
Recommendations
India already has a detailed legal framework for related party transactions. Section 188 of the Companies Act, 2013 requires Board and shareholder approval for certain transactions, and section 177 requires audit committee approval. Regulation 23 of the SEBI (LODR) Regulations, 2015 adds audit committee scrutiny, shareholder approval for “material” transactions and periodic disclosures.21
The weakness is in enforcement. Approvals are largely paper-based and check whether the process was followed, not whether the transaction was fair. A promoter-linked entity can still sell goods to the company at inflated prices, lend to it at high interest or charge heavy brand royalty, while every approval box is ticked. The recommendations below aim to move the system from “compliance on paper” to “compliance in practice”.
Every significant related party transaction should be physically and commercially verified, not merely reviewed on paper.
1. A team of independent inspectors, chosen by the audit committee and not by the management, should visit the related party’s premises. They would check whether the party actually has the capacity, staff and infrastructure to deliver what it is billing for.
2. They should verify that goods or services were really delivered, using stock records, delivery proofs, work logs and usage evidence.
3. Regulators such as SEBI and the Ministry of Corporate Affairs should conduct risk-based inspections, with companies showing repeated or unusually large related party transactions selected first.
4. For every material related party transaction, the company should prove that the price matches what an unrelated party would have charged.
5. At least two or three written quotations should be obtained from unrelated suppliers or service providers for similar goods or services.
6. Where quotations are not possible (for example, for unique products), an independent valuer or industry specialist should be used to set a fair price range.
7. The final price should be recorded in a “fair price report” placed before the audit committee and the shareholders.
8. If the related party’s price is higher than the market range, the company must explain in writing why it still chose that party.
9. Loans, advances and guarantees between the company and promoter entities should be tested against market interest rates.
10. The rate should be compared with what banks, non-banking financial companies or the bond market would charge a company of similar credit quality.
11. When the company lends to a promoter entity, the rate should not be lower than the company’s own borrowing cost.
12. When the company borrows from a promoter entity, the rate should not exceed prevailing market rates.
13. A professional, such as a chartered accountant or credit analyst, should certify this comparison.
14. Brand royalty paid to promoter-owned entities is one of the most debated related party transactions, because the benefit is hard to measure and the payments can be large and continuous. SEBI has recognised this by prescribing a lower materiality threshold for royalty and brand payments, but a numerical threshold alone is not enough.22
15. All the comparative analyses above should be carried out by qualified, independent professionals, such as chartered accountants, cost accountants, valuers and sector specialists.
16. They should be appointed by the audit committee, with the independent directors leading the selection, and not by the promoter or the management.
17. They must declare that they have no business or personal link with the promoter group.
18. Their names, credentials and fees should be disclosed.
*****
Footnotes
1. Minny Narang, Understanding Related Party Transactions: A Neglected Issue in Corporate Governance, 7 Asian J. Res. Bus. Econ. & Mgmt. 413 (2017), https://doi.org/10.5958/2249-7307.2017.00154.2.
2. The Companies Act, No. 18 of 2013, India Code (2013), § 2(76); Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (India) [hereinafter SEBI LODR Regulations], reg. 2(1)(zb); see also Shashank Bansal & M. Thenmozhi, Does Concentrated Founder Ownership Affect Related Party Transactions? Evidence from an Emerging Economy, 53 Res. Int’l Bus. & Fin. 101206 (2020), https://doi.org/10.1016/j.ribaf.2020.101206.
3. The Companies Act, No. 18 of 2013, India Code (2013), § 177(1), (4)(iv).
4. Id. § 177(2), (4), (9).
5. Id. § 188(1)–(5); Companies (Meetings of Board and its Powers) Rules, 2014, rule 15(3) (India) (prescribing the thresholds above which shareholder approval is required).
6. The Companies Act, No. 18 of 2013, § 184(1)–(2).
7. The Companies Act, No. 18 of 2013, § 166(2)–(5).
8. The Companies Act, No. 18 of 2013, § 149(4), (6).
9. SEBI LODR Regulations, reg. 23(2) & proviso.
10. SEBI LODR Regulations, regs. 23(1), 23(4), 23(9) (since 19 December 2025 a transaction is material if it exceeds the thresholds in Schedule XII, read with reg. 23(1): ten per cent of the listed entity’s annual consolidated turnover where that turnover is up to ₹20,000 crore, and lower slab-based thresholds above it; before that date, rupees one thousand crore or ten per cent of annual consolidated turnover, whichever was lower).
11. Bansal & Thenmozhi, supra note 2.
12. Id.
13. Raja Kali & Jayati Sarkar, Diversification and Tunneling: Evidence from Indian Business Groups, 39 J. Compar. Econ. 349 (2011), https://doi.org/10.1016/j.jce.2011.04.001.
14. Securities & Exchange Board of India, Analysis of Royalty Payments by Listed Companies to Related Parties 2, 5–6 (Dep’t of Econ. & Pol’y Analysis, Nov. 2024), https://www.sebi.gov.in/sebi_data/attachdocs/nov-2024/1731582432071.pdf [hereinafter SEBI Royalty Study]. Under regulation 23(1A) of the SEBI LODR Regulations, brand usage or royalty payments to related parties exceeding five per cent of annual consolidated turnover are material and require shareholder approval on a majority-of-minority basis: SEBI LODR Regulations, regs. 23(1A), 23(4).
15. SEBI Royalty Study, supra note 14, at 3–4, 18–19.
16. Id. at 2, 10.
17. Id. at 2, 11–12.
18. Id. at 3, 14–15.
19. Id. at 3–4, 18–19.
20. Id. at 4, 19.
21. The Companies Act, No. 18 of 2013, §§ 177, 188; SEBI LODR Regulations, reg. 23.
22. SEBI LODR Regulations, reg. 23(1A) (five per cent of annual consolidated turnover, against the general threshold in reg. 23(1)).