RPT Approval Process in India — From Audit Committee to Shareholder Vote

You are a director on the board of a listed Indian company. A subsidiary wants to lease office space from the promoter's private firm. Suddenly, you are dropped into the RPT approval process — and getting one step wrong can trigger SEBI penalties, news headlines, and equity-as-asset-class">shareholder lawsuits.

This walkthrough takes you from the first esg-and-sustainable-investing/best-esg-scores-indian-companies">governance/infosys-whistleblower-governance-case-study">audit committee meeting to the final shareholder vote. Each step is one box to tick. Miss a box, and the related party transaction is void.

Step 1: Identify the related party transaction

The starting point is recognising that a deal is even an RPT. A related party transaction is any deal between the company and a person or entity that has influence over it. That includes promoters, directors, subsidiaries, joint ventures, and key managerial personnel.

The company's Chief Financial Officer or Company Secretary usually flags these. They keep a master list of related parties under Section 2(76) of the Companies Act, 2013, and refresh it every quarter. If a counterparty is on that list, the deal cannot move forward without the RPT approval process.

Step 2: Audit committee review and pre-approval

The audit committee is the first gate in the RPT approval process. It must review every proposed related party transaction before the board even sees it. Pre-approval at this stage is a hard rule under Regulation 23 of the SEBI LODR.

The audit committee asks four questions:

1. Is the transaction in the ordinary course of business?
2. Is it on an arm's length basis?
3. Are the pricing and terms fair to public shareholders?
4. Are conflicts of interest disclosed in writing?

If the answer to any question is no, the audit committee can reject the deal outright or send it back for restructuring. Independent directors on the audit committee carry extra weight here, since they are meant to protect minority shareholders.

Step 3: Board of directors approval

Once the audit committee clears the deal, it moves to the full board. The board reviews the same set of facts, but with a wider business lens. Directors who are interested in the transaction must abstain from the vote and step out of the meeting room while it is discussed.

For ordinary-course, arm's-length deals, board approval is often the final stop. But the moment a deal crosses certain size thresholds, a fourth step kicks in.

Step 4: Shareholder approval for material RPTs

If the related party transaction is material, shareholders must vote on it. Under SEBI LODR, a transaction is material when it crosses 1,000 crore rupees or 10 percent of the company's annual turnover, whichever is lower. The 2022 amendment tightened these limits to push more deals into shareholder territory.

The vote happens by a special resolution at a general meeting or through postal ballot. The catch: only public shareholders can vote. Promoters and other related parties must abstain, even if they hold the majority of shares. This rule, called the majority of minority standard, gives small investors the final say on big related-party deals.

Disclosures that must go with the notice

Every notice to shareholders must include the name of the related party, the nature of the relationship, the value of the deal, and any benefits flowing to insiders. The notice must be clear enough for a ipo-allotments-sebi-role-retail-investor-protection">retail investor to spot the conflict and decide.

Step 5: Stock exchange disclosure and ongoing reporting

The RPT approval process does not end at the vote. Once approved, the company must file disclosures with the stock exchanges within 30 days. It must also report all related party transactions in its half-yearly results in a standard SEBI format.

Audit committee members must review actual deal performance every six months. If a transaction was approved at a fair price but executed at a different price, the committee must flag it and ask the board to act.

Common mistakes that trip up boards

• Treating an omnibus approval as unlimited: Audit committees can give blanket approval for routine deals, but only within a clear value cap. Crossing the cap means a fresh approval cycle.
• Skipping shareholder vote on amendments: Renewing or modifying an existing RPT is a fresh transaction. The size test applies again.
• Letting interested directors stay in the room: Even silent presence is a procedural breach. The minutes must show the director left.
• Vague pricing justification: Saying "market rate" without a benchmark is not enough. The audit committee needs a written fcf-yield-vs-pe-ratio-myth">valuation or comparable transaction note.

Frequently asked questions on the RPT approval process

What happens if a company skips the audit committee step?

The transaction becomes voidable at the option of the company under Section 188 of the Companies Act. SEBI can also impose penalties on directors and the company.

Are all subsidiaries treated as related parties?

Yes. A subsidiary, joint venture, and associate company all count as related parties. So do step-down subsidiaries.

Do private companies follow the same RPT approval process?

The Companies Act sections apply to private companies too, but the SEBI LODR layer applies only to listed entities. Private firms still need board approval and, for big deals, shareholder approval — but not the public disclosure step.

For the full text of the related party rules, the SEBI LODR is published on the SEBI website. Reading it once a year is good housekeeping for any board member or company secretary.

Strong corporate governance is built on small, repeatable steps like these. The RPT approval process is one of the clearest places to see governance in action.