How often must RPT policy be reviewed under SEBI LODR?

Executive Summary

• Mandatory triennial review: Regulation 23(1) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 mandates that the RPT policy SEBI LODR review must occur at least once every three years by the Board of Directors.
• Audit Committee oversight: The Audit Committee plays a pivotal role in recommending the RPT policy and its subsequent updates, ensuring adequate internal controls and transparency.
• Beyond statutory minimum: While a three-year review cycle is mandatory, leading enterprises conduct more frequent reviews as a governance best practice, particularly those with complex cross-border RPTs.
• Risk mitigation: Non-compliance with review mandates or ineffective policy implementation can lead to significant regulatory penalties, enforcement actions, reputational harm, and erosion of shareholder confidence.
• Cross-border complexity: Multinational corporations must align their RPT policies in India with global governance standards, accounting for diverse jurisdictional requirements and varying definitions of "related party."
• Strategic advantage: A robust and regularly reviewed RPT policy SEBI LODR review framework is not merely a compliance burden but a strategic mechanism that strengthens accountability, enhances transparency, and protects long-term enterprise value.

Understanding Related Party Transaction (RPT) Governance in India

Related Party Transactions are an inherent part of doing business, especially within diversified corporate groups or for companies with significant shareholder involvement. They involve a transfer of resources, services, or obligations between a company and a related party, regardless of whether a price is charged. While often legitimate and commercially beneficial, RPTs carry an inherent risk of conflicts of interest and potential exploitation of minority shareholders if not properly governed.

What Constitutes a Related Party Transaction?

Under both the Companies Act, 2013 and SEBI LODR, a "related party" is broadly defined. It includes directors, key managerial personnel, their relatives, holding/subsidiary/associate companies, and entities where directors or key managerial personnel hold significant influence. An RPT itself involves transactions with these defined related parties, covering a wide spectrum from sales/purchases of goods and services, leasing of property, rendering of services, to the appointment to any office or place of profit.

Why RPT Governance Matters for Listed Companies

For listed companies in India, robust RPT governance is paramount. The market and regulators closely scrutinize RPTs to ensure fair dealings, protect the interests of public shareholders, and prevent corporate malfeasance. Weak RPT controls can lead to diversion of funds, unfair terms, and ultimately, a breakdown of trust, which directly impacts a company's stock performance and its attractiveness to institutional investors and private equity funds.

For foreign investors and multinational corporations holding stakes in Indian listed companies, RPT governance directly influences:

• Transaction valuation: Weak governance reduces investor confidence and valuation multiples
• Regulatory compliance: Policy gaps trigger SEBI investigations and enforcement actions
• Shareholder confidence: Institutional investors demand transparent RPT frameworks
• Audit integrity: Statutory auditors rely on robust RPT policies for financial reporting accuracy
• Cross-border disclosure: Foreign regulators increasingly scrutinize Indian subsidiary governance

The SEBI LODR Framework for RPTs

The Securities and Exchange Board of India (SEBI) has established a comprehensive framework for RPTs through the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, particularly Regulation 23. This regulation aims to safeguard investor interests by mandating stringent approval processes, disclosure requirements, and clear policy guidelines for listed entities.

Key Provisions of Regulation 23 of SEBI LODR

Regulation 23 of SEBI LODR forms the bedrock for RPT governance. It mandates that every listed entity formulate a policy on materiality of RPTs and dealing with RPTs. This policy must be approved by the Board of Directors and disclosed on the company's website and in the annual report. Crucially, it sets out thresholds for "material" RPTs, requiring prior approval of shareholders by way of a special resolution, with related parties abstaining from voting. Non-material RPTs generally require Audit Committee approval.

Roles of the Board and Audit Committee

The Audit Committee of a listed entity holds a central position in RPT oversight. It is responsible for reviewing and approving all RPTs, whether material or not. For material RPTs, the Audit Committee's recommendation is crucial before seeking Board and, subsequently, shareholder approval. The Committee must also specifically review the RPT policy and recommend its updates to the Board.

The Board of Directors is responsible for the overall governance framework, including the approval of the RPT policy and ensuring its effective implementation. Their oversight ensures that the company operates within the spirit and letter of the law, fostering transparency and accountability.

How Often Must the RPT Policy Be Reviewed Under SEBI LODR?

Understanding the specific mandate regarding RPT policy SEBI LODR review frequency is critical for maintaining robust compliance and mitigating regulatory exposure.

The Statutory Review Mandate

As per Regulation 23(1) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, a listed entity is required to formulate a policy on materiality of Related Party Transactions and on dealing with Related Party Transactions. This policy must be approved by the Board of Directors.

The critical stipulation regarding review frequency is found within this regulation: "The policy shall be reviewed by the board of directors at least once every three years and updated accordingly."

This means that the RPT policy SEBI LODR review, which governs how a listed company identifies, assesses, approves, and discloses RPTs, cannot remain static. It must undergo a formal review process by the Board of Directors at least once every three financial years from the date of its last approval or review. The Audit Committee typically initiates this process by reviewing the existing policy, proposing amendments based on regulatory changes, operational experiences, or best practices, and then recommending it to the Board for approval.

Beyond the Mandate: Best Practices for Continuous Oversight

While the SEBI LODR mandates a minimum triennial review, a comprehensive and proactive governance approach dictates more frequent assessments. In the ever-evolving regulatory landscape and dynamic business environments, relying solely on the statutory minimum can expose companies to unforeseen risks. Leading multinational corporations and well-governed listed entities often choose to:

1. Annual Review: Conduct an annual review by the Audit Committee, even if no major changes are recommended to the Board, to confirm its continued relevance and effectiveness.

2. Event-Driven Review: Initiate a review whenever there are significant changes in:

   • Applicable laws or regulations (amendments to Companies Act, 2013, or SEBI LODR)
   • The company's business model or operational structure, especially involving new subsidiaries, joint ventures, or international expansion
   • The composition of the Board or key management personnel
   • Increased volume or complexity of RPTs, particularly cross-border transactions with international affiliates
   • Feedback from auditors or internal compliance reviews

This proactive approach ensures that the RPT policy remains a living document, reflecting the current operational realities and regulatory expectations, rather than a mere procedural checklist.

Distinguishing Policy Review from Transaction Approvals

It is important to differentiate between the periodic review of the overarching RPT policy and the routine approval of individual RPTs. Individual RPTs, whether material or not, require approval by the Audit Committee (and sometimes the Board and shareholders) at the time they are entered into. The policy review, however, pertains to the framework, principles, thresholds, and procedures governing all RPTs, ensuring that these underlying rules remain current and effective.

What Must the RPT Policy Review Cover?

The RPT policy SEBI LODR review should address several critical dimensions:

Regulatory Alignment

Ensure the policy reflects current SEBI LODR provisions, including materiality thresholds, approval mechanisms, disclosure requirements, and shareholder voting protocols. The policy must incorporate any amendments issued by SEBI through circulars or notifications.

Related Party Identification

Update the list of related parties based on:

• Board composition changes
• Key managerial personnel appointments
• Subsidiary and associate relationships
• Promoter shareholding changes
• Business restructuring

Materiality Thresholds

Review and recalibrate financial thresholds defining material RPTs requiring shareholder approval. Regulation 23(1) defines material RPTs as transactions exceeding 10% of annual consolidated turnover.

Approval Processes

Evaluate whether approval workflows covering audit committee, board, and shareholder approvals remain efficient and compliant. The policy should clearly delineate:

• Transactions requiring Audit Committee approval only
• Transactions requiring Board approval
• Transactions requiring shareholder approval through special resolution

Disclosure Protocols

Assess disclosure adequacy in financial statements, board reports, stock exchange filings, and website publications. The policy must ensure compliance with quarterly, half-yearly, and annual disclosure requirements under SEBI LODR.

Arm's Length Pricing

Review mechanisms ensuring RPTs occur at arm's length basis with independent valuation where necessary. This is particularly important for cross-border transactions subject to transfer pricing regulations under the Income-tax Act, 1961.

Audit Committee Effectiveness

Evaluate whether the audit committee has adequate resources, expertise, and independence to oversee RPT governance effectively.

Compliance Risks: Consequences of Inadequate RPT Policy Reviews

Failure to conduct timely RPT policy SEBI LODR review creates multiple compliance, operational, and reputational risks:

SEBI Enforcement Actions

Non-compliance with Regulation 23 attracts monetary penalties, regulatory investigations, show-cause notices, and enforcement proceedings. SEBI has imposed substantial penalties on companies and directors for RPT-related governance failures.

Audit Qualifications

Statutory auditors may qualify financial statements if RPT policies are outdated, inadequately implemented, or inconsistent with regulatory requirements. Audit qualifications damage investor confidence, affect credit ratings, and complicate fundraising efforts.

Disclosure Violations

Outdated policies may lead to inadequate or inaccurate RPT disclosures in financial statements, annual reports, and stock exchange filings, creating legal liability and regulatory exposure.

Director Liability

Directors, particularly independent directors serving on audit committees, face fiduciary breach allegations if they fail to ensure periodic RPT policy SEBI LODR review. Section 166 of the Companies Act, 2013 imposes statutory duties on directors to act with due care, skill, and diligence.

Investor Concerns

Institutional investors, foreign funds, and private equity firms conducting due diligence scrutinize RPT governance carefully. Stale policies signal weak board oversight, governance negligence, and compliance failures, leading to valuation discounts or deal terminations.

Litigation Risk

Shareholders, especially minority shareholders, may file derivative suits, class actions, or oppression and mismanagement petitions alleging RPT-related governance failures.

Cross-Border Considerations for Multinational Corporations

For multinational corporations and foreign investors with listed Indian subsidiaries, the RPT policy SEBI LODR review presents unique challenges that extend beyond mere compliance.

Aligning Global and Indian Governance Standards

Multinational corporations often operate under global RPT policies that may differ in scope, materiality thresholds, and approval hierarchies from those mandated by SEBI LODR. The challenge lies in ensuring that the Indian subsidiary's policy is fully compliant with Indian regulations while maintaining consistency with global governance frameworks.

Multiple Regulatory Jurisdictions

Cross-border groups must navigate Indian SEBI regulations alongside home country listing requirements, SEC rules (for US-listed parents), UK Corporate Governance Code, or EU regulations. RPT policies must accommodate overlapping regulatory expectations without creating compliance gaps.

Transfer Pricing Complexity

Related party transactions involving international subsidiaries attract both corporate governance scrutiny under SEBI LODR and transfer pricing examinations under the Income-tax Act, 1961. Governance policies must align with tax compliance frameworks to avoid dual regulatory exposure.

Investor Due Diligence Standards

Foreign institutional investors, sovereign wealth funds, and pension funds apply rigorous ESG and governance standards during due diligence. Outdated RPT policies trigger red flags, delay deal closure, or result in valuation adjustments.

Foreign Regulator Expectations

US SEC, UK FCA, and other regulators scrutinize RPT governance in foreign subsidiaries owned by listed parent companies. Weak governance in Indian listed subsidiaries creates reputational and regulatory risks for overseas parent entities.

Practical Steps for Effective RPT Policy Review

Companies must adopt best practices to ensure robust governance over RPT policy SEBI LODR review processes:

Step 1: Schedule Regular Board and Audit Committee Review

Include RPT policy SEBI LODR review as a standing agenda item in at least one audit committee meeting within each three-year cycle, preferably before finalizing annual financial statements.

Step 2: Conduct Regulatory Gap Analysis

Compare existing policy provisions against current SEBI LODR requirements, recent circulars, and regulatory best practices.

Step 3: Update Related Party Lists

Refresh related party schedules based on board changes, subsidiary formations, key managerial appointments, and promoter shareholding updates.

Step 4: Evaluate Implementation Effectiveness

Review whether the policy operates effectively in practice by examining transaction approvals, disclosure accuracy, and audit committee oversight.

Step 5: Document Review Outcomes

Maintain detailed audit committee minutes documenting policy review discussions, amendments recommended, and board approval obtained.

Step 6: Disclose Updated Policy

Upload the revised policy on the company website and ensure appropriate disclosure in annual reports and board reports.

Step 7: Train Board and Management

Conduct periodic governance training for directors, key managerial personnel, and senior management on RPT identification, approval processes, and disclosure obligations.

Common Governance Failures to Avoid

Mechanical Compliance

Treating RPT policy SEBI LODR review as a checkbox exercise without substantive evaluation creates governance vulnerabilities.

Delayed Updates

Waiting until regulatory enforcement or audit qualifications occur before updating policies increases compliance exposure.

Inadequate Documentation

Failing to document audit committee deliberations, rationale for amendments, and board approvals weakens governance evidence.

Poor Related Party Identification

Overlooking complex related party relationships, especially in multinational groups, creates disclosure gaps and audit issues.

Ignoring Business Changes

Not updating policies when business models evolve, acquisitions occur, or corporate structures change leads to policy-practice misalignment.

Frequently Asked Questions

How often must an RPT policy be reviewed under SEBI LODR?

SEBI LODR Regulation 23(1) mandates that the RPT policy SEBI LODR review must occur at least once every three years by the Board of Directors. However, companies should conduct more frequent reviews whenever regulatory amendments, business restructuring, ownership changes, or governance concerns necessitate revisions.

Who is responsible for reviewing the RPT policy?

The Audit Committee, comprising independent directors, is statutorily responsible for conducting the RPT policy SEBI LODR review and recommending amendments. Material amendments must be approved by the Board of Directors before implementation.

What happens if a listed company fails to review its RPT policy within three years?

Non-compliance attracts SEBI penalties, regulatory investigations, audit qualifications, shareholder disputes, director liability, and reputational damage. Institutional investors may also view outdated policies as governance red flags during due diligence.

Can RPT policies be updated more than once every three years?

Yes. While three-year review is the minimum statutory requirement, policies must be updated immediately whenever regulatory amendments, business restructuring, ownership changes, or governance concerns necessitate revisions.

Do unlisted subsidiaries of listed companies need RPT policies?

While unlisted subsidiaries are not directly governed by SEBI LODR, consolidated financial statements of listed parent companies must disclose RPTs involving subsidiaries. Governance best practices recommend maintaining RPT policies across group entities.

How does RPT policy review affect foreign investors?

Foreign investors conducting due diligence scrutinize RPT governance carefully. Outdated policies signal weak oversight, creating valuation concerns, deal delays, and compliance risks, particularly for cross-border transactions involving Indian listed companies.

What documentation must be maintained for RPT policy reviews?

Companies must maintain audit committee meeting minutes documenting review discussions, amendments recommended, board approval resolutions, updated policy versions, website disclosures, and compliance certificates filed with stock exchanges.

Strategic Takeaway

RPT policy SEBI LODR review is not administrative paperwork. It is foundational governance infrastructure protecting minority shareholders, ensuring regulatory compliance, supporting investor confidence, and reducing board liability.

For multinational corporations, institutional investors, and cross-border businesses, RPT governance directly impacts transaction valuations, due diligence outcomes, regulatory standing, and operational resilience. Outdated policies create avoidable compliance exposure, shareholder disputes, and reputational damage.

The three-year review mandate exists because related party relationships, business structures, and regulatory expectations evolve continuously. Governance systems must keep pace or risk regulatory enforcement, investor flight, and enterprise damage.

Proactive governance beats reactive crisis management. Always.

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