MERGER AND ACQUISITION END TERM SUMMATIVE ASSESSMENT

STRENGTHEN LAWS RELATED

PARTY TRANSACTIONS UNDER
LODR

Submitted to – Assistant Prof. Yash Pandey

Submitted By: Husain Bohra

Enrolment No.- 20200401038
Section: A
Batch: 2020-25
TABLE OF CONTENTS
ABSTRACT............................................................................................................................................3
INTRODUCTION..................................................................................................................................3
RESEARCH METHODOLOGY.........................................................................................................4
OVERVIEW OF RELATED PARTY TRANSACTIONS..................................................................4
LEGAL FRAMEWORK IN INDIA.....................................................................................................5
STRENGTHENING THE REGULATORY FRAMEWORK FOR RELEATED PARTY
TRANSACTIONS..................................................................................................................................7
ANALYSIS OF JUDICIAL PRONOUNCEMENTS......................................................................8
INTERNATIONAL LAWS PRACTICE FOR REGULATING RELATED PARTY
TRANSACTIONS..............................................................................................................................9
CASE STUDY OF RELATED PARTY TRANSACTIONS.............................................................10
CONCLUSION.....................................................................................................................................11
BIBLIOGRAPHY................................................................................................................................12
ABSTRACT

This study aims to highlight the need for parties to tighten up their dealings when it comes to
mergers and acquisitions in LODR. The Companies Act of 2013, the Securities Contact
(regulation) the Act of 1956, the SEBI (listing obligations and disclosure requirements) the
rules of 2015, and the LODR consultation paper issued on February 21st are among the
legislation that have been critically evaluated. This study has placed a strong focus on
openness, fairness, corporate governance, and shareholder protection in party transactions.
challenges and concerns in party transactions, such as how to balance the interests of all
parties involved and identify any dangers. Well-known court rulings in this field, as well as
the Securities Appellate Tribunal and NCLT1, are examined. Furthermore, the study improves
the law governing transaction within a company and enhancing transparency and liability. An
additional analysis that takes into consideration the processes used under different regimes is
also undertaken. The study’s finding makes a case to enforce stricter contract law and offers
more measures that could be instituted and other areas to explore.

INTRODUCTION

A "related-party transaction" is a contract or arrangement between two parties who are linked
by an ongoing business connection or a common interest. Companies often want to conduct
business with individuals or organisations that they are familiar with or have interests with.
Related party transactions (RPTs) are necessary for the smooth running of businesses but can
also lead to unfair advantages and conflicts of interest or promote frank and transparent
discussions. RPTs in the Indian context are governed by the Listing Obligations and
Disclosure Requirements (LODR), which are overseen by the (SEBI).2

RPTs cover business dealings between a corporation and its family, directors, officers,
significant shareholders, and other related persons. These transactions have the ability to
affect

1
(Mar. 6, 2023), https://corporate.cyrilamarchandblogs.com/2023/07/sebi-amendments-to-the-lodr
2
Utkarsh Rai, A New Dawn for Corporate Special Rights in India, "SEBI's Lodr Amendmends",, OP Jindal Global
Law School 3-4 (2023).
minority shareholder interests and the integrity of the market as a whole. They can take many
different forms, from straightforward agreements to intricate financial arrangements,
acquisitions, or sales.

Provisions under Companies Act of the 2013 and the SEBI (Listing Obligations and
Disclosure Requirements) Regulations of the 2015 comprise the main legislative framework
that governs RPTs in India. But as the business environment changes and worries about RPTs
grow more prevalent, it's critical to evaluate how suitable these regulations are and think
about making changes to fortify the regulatory framework.

Moreover, in this we examine the laws currently in place regarding Related Party
Transactions (RPTs), evaluating how they are put into practise and looking at global
standards. It examines issues with the existing legal system and makes recommendations for
changes to reduce conflicts of interest, improve disclosure requirements, and safeguard
minority shareholders. The influence of recent RPT-related court rulings on corporate
governance in India is also examined and evaluated in this article. To sum up, the research
intends to provide a comprehensive analysis of RPT regulations, highlighting flaws and
suggesting changes to strengthen accountability, transparency, and investor protection. This
will add to the conversation on fair corporate transactions within the regulatory framework of
India.3

RESEARCH METHODOLOGY

The author used secondary sources including newspapers, journals, publications, statutes, and
online legal databases like Manupatra and SCC to do research for this doctrinal work.

OVERVIEW OF RELATED PARTY TRANSACTIONS

Business dealings involving related parties are known as RPTs. Businesses frequently take
advantage of their current assets and make agreements with pre-existing networks. From an
economic and operational perspective, most of these transactions make sense as long as the

3
Harpreet Singh Bedi, MERGER & ACQUISITION IN INDIA: An Analytical Study, Lovely School of
Business 9-15
interests of the firms, directors, and management are mostly aligned. Occasionally, the only
choice is to interact with the related business.

A number of acts govern RPTs. This is due to the possibility of prejudice in such
transactions. when a linked party in a contract may be given preference by the promoter or
important people. The interest of the stockholders might be harmed.

For instance, a business could rent a structure from a director's family. and provide more than
what is considered fair. could charge the linked firm far more for the services than they are
worth. They frequently come from shareholder funds. Strict oversight of RPTs is essential for
maintaining sound corporate governance and averting legal risks.4

Related party transactions are primarily governed by the Companies Act of 2013 and SEBI
(listing duties and disclosure requirements) of 2015 5, which was modified by notice dated
November 9, 2021. Despite establishing a number of safety measures, the Act does not
prohibit RPTs. According to Section 188, the board report to the shareholder must disclose
any linked party transactions. Furthermore, it ought to be approved (in accordance with the
Act's specified threshold limitations).

The value of researching RPTs to safeguard against self-serving transactions for investors,
especially minority shareholders. The effect of RPTs on the operational performance of
Indian businesses is also investigated in this study. The empirical findings imply that loans
and bank guarantees, as well as RPTs, have a negative effect on performance as determined
by ROA. The study suggests more frequent disclosure intervals along with more structure and
clarity in RPT reporting standards. Overall, the study highlights how important it is to
provide RPTs the proper and thorough examination, especially from regulators and minority
shareholders.

LEGAL FRAMEWORK IN INDIA

In accordance with the Companies Act of 2013, SEBI adopted the Listing Regulations on
September 2, 2015, with the goal of streamlining the listing agreements for multiple capital
markets under a single statute. The Listing Regulations are scheduled to go into effect on
December 1st, 2015.

4
Groww Team, What is Related Party Transactions, Understand Related Party Regulation (Mar. 7,
2022), https://groww.in/blog/all-about-related-party-transactions.
5
supra
The Companies Act 2013, section 23(1)(c) specifically states that a listed entity must follow
the provisions on directors’ remuneration.

One of its clauses is dedicated to RPTs under SEBI (Listing Obligations and Disclosure
Requirements), of 2015. SEBI listing obligations and disclosure requirements Regulations
also require listed companies to create a policy that will cover issues concerning the
disclosure of material related party transactions and related-party conflicts. Policy statements
should also appear in a publication that is available on the company’s intranet and endorsed
by the board. The SEBI LODR Regulations apply to all listed entities such as equities,
options, debentures, and bonds among others. Debt instruments of listed companies that
issued Indian Depository Receipts (IDRs’) are also under these constraints.6

It is important to remember that SEBI LODR Regulations apply to all such transactions,
whether they are carried out regularly or not. Listed firms are required every quarter to
declare all related party transactions and their details such as the nature of the relation and
amount involved. The Audit Committee of the board of directors is required by regulation to
approve all important relevant party interactions in advance.

The SEBI (Listing Obligations and the Disclosure Requirements) Regulations, 2015 do not
specifically state any authority granted to courts regarding RPT. However, it sets up a
procedure for dealing with breaches of these specific provisions on RPTs.

Every time there is a change from the requirements of the SEBI with his LODR Regulations,
the Compliance Officer is supposed to notify the Board of Directors. Thereafter, the Board of
Directors will undertake the appropriate measures towards rectifying the non-compliance.
The matter may be brought before the stock exchanges (where the listed entity's securities are
traded) if the non-compliance is not remedied. The stock exchange(s) may impose penalties
or other appropriate actions on the listed firm. However, in cases involving RPTs, the court's
jurisdiction will mostly depend on the kind, scope, and legality or illegality of the problem. 7

6
(Aug. 5, 2016),
https://www.icsi.edu/media/webmodules/publications/SEBI_(Listing_Obligations_and_Disclosure_Requirement
s)_Regulations_2015.
7
Full Bio, Related-Party Transaction: Definition, Examples, Disclosure Rules, (Apr. 7, 2022)
STRENGTHENING THE REGULATORY FRAMEWORK FOR
RELEATED PARTY TRANSACTIONS

To address the issue of poor transparency and insufficient protection for minority
shareholders, the Securities and Exchange Board of India (SEBI) has suggested modifications
to the Listing Obligations and Disclosure Requirements (LODR) laws. Among the suggested
adjustments are a new provision mandating the disclosure of any agreement, whether or not
the listed entity is a party to it, that affects the management or control of the listed business,
or that places any restrictions or establishes any responsibility on the listed entity.

A condition that says such agreements have to be authorised by the listed company's board of
directors as well as by a special resolution passed by the shareholders, with support from the
majority of the minority shareholders. By May 31, 2023, for the listed firm, and by June 30,
2023, for the stock exchanges, all existing agreements must be reported. The Board of
Directors and shareholders must also be presented with existing agreements for approval at
the first AGM/EGM8 to be conducted after April 1, 2023.These modifications aim to
safeguard minority shareholders, increase transparency, and guarantee that listed firms are
operating in their own best interests.

By amending the SEBI (Listing Obligations and the Disclosure Requirements) Regulations,
2015, SEBI has made substantial modifications to the governance structure for listed
businesses. The modifications, which take into effect on July 14, 2023, are primarily intended
to impose stricter transparency and governance requirements on listed companies. Among the
changes are: Required disclosure of events or information that, based on the past three
audited consolidated financial statements, exceeds 2% 9 of turnover, 2% of net worth, or 5%
of the average absolute value of profit or loss after taxes. Disclosure of agreements if they
really or potentially affect the management or control of the listed business, impose any
restrictions or establish liability upon the listed entity, or to which certain covered people are
parties. Any reported events or information in the mainstream media that the top 250 listed
entities (starting on April 1, 2024) and top 100 listed entities (starting on October 1, 2023)
confirm, deny, or explain. Once every five years, special rights granted to shareholders
must have mandatory

8
Sebi, (Jan. 28, 2020), https://www.sebi.gov.in/legal/regulations/jan-2020/securities-and-exchange-board-
of- india-listing-obligations-and-disclosure-requirements-regulations-2015
9
Analysis of Recent Changes in the RPT Framework vis-à-vis SEBI (Listing Obligations and Disclosure
Requirements)(Sixth Amendment) Regulations, 2021, SCC Blog (Mar. 2, 2022)
shareholder approval. Business transfer agreements involving the sale, lease, or dispose of all
or nearly all of the listed entity's enterprise outside of a scheme of arrangement mechanism
are subject to mandatory shareholder approval.10 A director may only remain on the board
with the consent of the shareholders at least once every five years from the date of their
appointment or re-appointment. It is mandatory to fill open positions in the MD, full-time
director, manager, CEO, CFO, and compliance officer positions within three months after the
date of the vacancy.

ANALYSIS OF JUDICIAL PRONOUNCEMENTS

The proposed amendments aim to improve transparency and parity of information for public
shareholders by requiring enhanced approvals from public shareholders, including a majority
of public shareholders, in related party transactions (RPTs) in compliance with the Listing
Obligations and Disclosure Requirements (LODR) and its regulations. The uneven,
perplexing, and sometimes contradictory recommended structure in the amendments leads to
unintended consequences.

Particularly with regard to the disclosure of inter-se agreements involving shareholders,

promoters, promoter groups, linked parties, directors, senior managerial people, and other
officers of a listed firm, the proposed revisions' wording is unclear. Without taking into
account the nature, scale, or significance of the agreements, the amendments' incredibly broad
breadth might affect all shareholder agreements that affect a listed firm. This broad reach
might lead to problems with harmonisation and clash with other SEBI laws.

Furthermore, compared to the current RPT restrictions under Regulation 23 of LODR

regulations, the proposed revisions seem more onerous. Since both of these rules and the RPT
regulations deal with agreements and transactions involving promoters, shareholders,
directors, and the important managerial staff of a listed firm11, there are interpretive problems
with how these laws should be applied, leaving uncertainty about the framework that will
apply.

The practical difficulties in putting these amendments into practice include the requirement
for specialized legal counsel when signing contracts about the exercise of voting rights at the
board or shareholder level, restrictions on other promoters' voting rights, and possible
enforceability issues in M&A deals driven by promoters. Financial investors in listed
firms will also be

10
supra
11
(Mar. 6, 2023), https://corporate.cyrilamarchandblogs.com/2023/07/sebi-amendments-to-the-lodr-an-
overview-of-key-changes/.
impacted by the plans, which would require disclosure and ratification of current agreements
at the first annual general meeting or an extraordinary general meeting held after April one of
2023.

The modifications increase the power of the audit committee and independent directors,
granting them greater discretion in evaluating contracts and recommending approval by
shareholders. This burdens these organisations, particularly because executive directors often
have connections to promoters or promoter associations.

Although the proposed revisions have commendable goals, the framework still needs to be
clarified, consistent, and harmonised with current legislation. To guarantee successful
implementation and investor protection, practical obstacles, enforceability issues, and the
enhanced responsibilities of independent directors and the audit committee should be
carefully reviewed.12

INTERNATIONAL LAWS PRACTICE FOR REGULATING RELATED PARTY

TRANSACTIONS

Under the Sarbanes Oxley Act of 2002, public companies in the United States are prohibited
from offering or arranging personal loans to any director or executive officer. According to
NASDAQ requirements, the audit committee or another body of independent directors must
additionally examine and approve all RPTs. Moreover, the Securities Exchange Commission
(SEC) requires the disclosure of director compensation and transactions above USD 120,000
in which a related party has a direct or indirect substantial interest, as per Regulation S-K,
Item
404. Major RPTs must be disclosed in compliance with US GAAP, even though the
disclosure location is not stated. The US does not need shareholder permission for RPTs, in
contrast to India. However, because of strong regulatory constraints, investors in the US have
the ability to take legal action against abusive related-party transactions. 13

12
SEBI LODR and Companies Act of 2013 ICSI 2013
13
An Analysis of Related party transactions in india, (Oct. 29, 2013)
CASE STUDY OF RELATED PARTY TRANSACTIONS

A few illustrations of RPT violations and their effects on investors. According to Gopalan et
al. (2007), Indian creditors and investors were aware of the tendency of group-affiliated
companies to lend money to inefficient group companies and, in the event that they were
unable to raise capital, to transfer money through inter-corporate loans. These transactions
cause the company to become bankrupt and eventually fail in addition to decreasing its worth.
A clear example of deceit and its cover-up using RPTs is the recent collapse of Satyam
Computers. The report also references Kohlbeck and Mayhew (2010)14, who discovered that,
in comparison to enterprises that abstained from RPTs, those that indulged in them had lower
valuations and subsequent returns.

First, as demonstrated by Satyam Computers, RPTs may be used to commit fraud and conceal
financial problems. This emphasises how crucial disclosure and openness are in RPTs to stop
these kinds of misuses. Second, RPTs have the potential to have a detrimental effect on a
company's operational performance and diminish its worth, which can result in bankruptcy
and collapse. This emphasises how important it is to regulate and supervise RPTs effectively
in order to stop abusive practises that endanger investors and other stakeholders.

Thirdly, in the event that group-affiliated enterprises are unable to raise capital, they have a
tendency to shift financial resources through inter-corporate loans to other inefficient group
companies, thus creditors and investors need to be mindful of this tendency. This emphasises
how crucial it is to do your research and evaluate your risks before investing in businesses
that use RPTs. In order to safeguard investors and stop RPT abuses, case studies conclude
that robust legislative measures that empower investors to pursue legal action against abusive
related-party transactions are essential.15

14
An Analysis of Related party transactions in india, (Oct. 29, 2013),
https://www.iimb.ac.in/sites/default/files/2018-07/WP_No._402_0.pdf.
15
(Nov. 9, 2016), https://www.icsi.edu/media/webmodules/companiesact2013/Final_LODR.pdf.
CONCLUSION

Briefly, this research highlights a pressing call for stringent appraisal and a tougher
legislature over RPTs under the LODR act in India. An examination of current legislation,
including the Securities Contract (Regulation) Act of 1956, the Company's Act of 2013, and
the SEBI listings and disclosure requirements of 2015.

This study explores issues linked with RPTs including conflict of interest, inadequacy of
disclosures, and threats to minority shares. The study looks at modern judicial articulations
concerning corporate governance in India, revealing a shift in the relevant legal context. The
analysis also goes beyond national borders, comparing international rules used for controlling
RPTs, especially those that are applied in the US.

The paper provides a critical review of the existing legal regulations concerning RPT
violations and examines the underlying weaknesses in the system using a few case studies
highlighting how the violation led to harm or death. Although these suggested amendments
are well- intentioned and aimed at increasing transparency and accountability, they also pose
implementation difficulties and possible ambiguous interpretations that require due
deliberation.

To improve regulation formulation and address potential implementation hurdles, the study
also suggests a coherent response to all these concerns that entails a uniform view for an
improved revision of regulations as well as better sharing of duties amongst players. This
research provides several valuable insights regarding related party transaction complications
that strengthen corporate governance, a disclosure as well and investor protection.
BIBLIOGRAPHY

1. Analysis of Recent Changes in the RPT Framework vis-à-vis SEBI (Listing

Obligations and Disclosure Requirements)(Sixth Amendment) Regulations, 2021,
SCC Blog (Mar. 2, 2022), https://www.scconline.com/blog/post/2022/03/02/sebi-
listing-obligations- and-disclosure-requirementssixth-amendment-regulations/.
2. Sebi, (Jan. 28, 2020), https://www.sebi.gov.in/legal/regulations/jan-2020/securities-
and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-
regulations-2015-last-amended-on-janhttps://www.sebi.gov.in/legal/regulations/jan-
2020/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-
requirements-regulations-2015-last-amended-on-january-10-2020-
_37269.htmlvhttps://www.sebi.gov.in/legal/regulations/jan-2020/securities-and-
exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-
2015-last-amended-on-january-10-2020-_37269.htmluary-10-2020-_37269.html.

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https://www.iimb.ac.in/sites/default/files/2018-07/WP_No._402_0.pdf.

4. Full Bio, Related-Party Transaction: Definition, Examples, Disclosure Rules, (Apr.

7, 2022), https://www.investopedia.com/terms/r/related-partytransaction.asp.

5. (Nov. 9, 2016),
https://www.icsi.edu/media/webmodules/companiesact2013/Final_LODR.pdf.

6. Sebi, Disclosure obligations of listed entities in relat (Nov. 28, 2021),

https://www.sebi.gov.in/legal/circulars/nov-2021/disclosure-obligations-of-listed-
entities-in-relation-to-related-party-transactions_54113.html.

7. Related Party presentation, (May 12, 2020),

https://www.icsi.edu/media/filer_public/33/3f/333f6925-2c13-4990-9eed-
a5e4799297c1/related_party_presentation_-_manoj_banthia.pdf.

8. (Mar. 6, 2023), https://corporate.cyrilamarchandblogs.com/2023/07/sebi-

amendments- to-the-lodr-an-overview-of-key-changes/.