SEBI has also expanded the scope to include entities related in the past financial year and not just the current year – increasing the number of transactions caught by the rules, practical challenges in tracking relationships and maintaining compliance records. 
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India Inc is bracing for fresh compliance challenges and legal ambiguities as SEBI’s new rules on related party transactions (RPTs) come into effect in July. While the regulations aim to boost transparency and protect investor interests, experts say the framework is riddled with ambiguities and imposes a heavy compliance burden — risking delays even in bona fide deals.

At the heart of industry concerns is the rise in disclosure requirements, documentation and expanded role of audit committees and independent directors. The result: slower decision-making and mounting costs, particularly for promoter-driven and mid-sized companies with limited in-house capacity.

Companies must now present detailed justifications for RPTs, including independent valuation reports, fairness opinions, arm’s-length assessments, and financial performance metrics of the related party — before even seeking audit committee or shareholder approval.

But determining what qualifies as arm’s-length or “fair” is often subjective, especially when no market comparables exist, and transactions involve unique assets or bespoke terms, said Rashi Dhir, senior partner at DMD Advocates. “This can lead to disagreements between management, audit committees, and even regulators over whether a deal passes the test,” Dhir said.

Vijay Iyer, partner and transfer pricing leader at EY India, said that the arm’s-length price requirement could be eased where monetary interests are protected and transactions clearly benefit minority shareholders. “There should be a higher threshold for applying such onerous compliance requirements to make it more practical and efficient,” he added.

Compliance burden

The increased burden could slow down deal timelines, and introduce friction in executing strategic transactions, joint ventures, or restructuring exercises, Lokesh Dhyani, partner at Aekom Legal said. “While the rules may curb questionable practices, they also discourage flexibility and speed in legitimate deal-making,” he added.

Even large conglomerates, many of which rely on intra-group arrangements for efficiency, may be forced to restructure existing setups, reducing operational synergies. “Transactions will slow due to longer preparation, approval, and disclosure cycles. Increased board and shareholder scrutiny introduces uncertainty into deal approvals, particularly for transactions with high complexity or valuation subjectivity,” Dhir said.

SEBI has also expanded the scope to include entities related in the past financial year and not just the current year – increasing the number of transactions caught by the rules, practical challenges in tracking relationships and maintaining compliance records. Additionally, the 10 per cent materiality threshold for shareholder approvals creates valuation challenges, especially for non-cash or irregular transactions.

Rule ambiguities

The new norms raise several unanswered questions. For example, there is a lack of clarity on how CEOs, CFOs, and promoter directors are expected to certify the fairness of RPTs, with no defined benchmarks provided, experts said.

Audit committee members now face heightened responsibility and liability, pushing them to adopt risk-averse, delay-prone approaches. However, it isn’t defined how they are expected to ensure disclosures are complete and sufficient.

The requirement for independent directors alone to approve RPTs conflicts with their oversight role by requiring them to become operationally involved is due to the extensive nature of disclosures mandated. “The increased burden may not only discourage capable professionals from accepting such roles but may also blur the line between oversight and management,” Dhyani said.

Even former SEBI chairman M. Damodaran has flagged the inconsistencies, saying that the detailed disclosure mandates could amount to regulatory overreach.

Published on May 1, 2025