Why RPTs Are the Most Common Way Promoters Harm Minority Shareholders

Roughly one in three sebi/maximum-fines-sebi-impose-corporate-esg-and-sustainable-investing/best-esg-scores-indian-companies">governance-violations">corporate governance disputes that reach SEBI in India involves a related party transaction (RPT) gone wrong. That is the single largest category. If you ever asked what is corporate governance in India and where it actually breaks, the honest answer is at the RPT line — the deceptively simple deal between a listed company and a related entity owned, controlled, or influenced by its promoter.

Here are the seven steps by which RPTs quietly transfer equity-as-asset-class">shareholders">minority shareholders' money out of a listed company, and the warning signs every ipo-allotments-sebi-role-retail-investor-protection">retail investor should learn to spot.

1. Sell from a private promoter entity to the listed company at inflated prices

The simplest extraction. The promoter owns a private supplier or service company. The listed company buys raw materials, services, or technology from that private entity at prices well above market rates. Profits flow into the private company, away from public shareholders. Disclosed as "in the ordinary course of business and at arm's length", but rarely tested for fair pricing in any meaningful way.

2. Buy assets from the listed company at below-market prices

The reverse trick. The listed company sells a real estate parcel, a brand, or a non-core business unit to a privately held promoter entity at a "negotiated" price below independent fcf-yield-vs-pe-ratio-myth">valuation. A subsequent resale at fair value lands all the gain in the promoter's pocket. The original sale appears legitimate because there is some valuation report — usually one prepared by a consultant friendly to the promoter.

3. Lend money to a promoter group at concessional rates

The listed company gives a "business advance" or low-interest loan to a private promoter entity. The advance funds the promoter's personal projects or unrelated ventures. The interest rate is below market, the term is open-ended, and recovery is informal. Some advances quietly become permanent — written off years later as "doubtful".

4. Provide a corporate guarantee for a promoter entity

The listed company guarantees a loan taken by a promoter-owned entity from a bank. If the promoter venture fails, the bank calls in the guarantee, and the listed company's cash pays for the loss. Public shareholders lose value, the promoter walks away from their failed venture without personal cost.

5. Lease a promoter property to the listed company at premium rates

The listed company rents office space, factory premises, or branded retail outlets from a property owned privately by the promoter. The lease rates are above market. Over a 10-year lease, the rent overcharge can equal a small acquisition. Disclosed as "rent paid to related party" in note 30 of the annual report — where most retail investors never read.

6. Pay royalty to a promoter-owned brand entity

The brand or trademark sits with a promoter-controlled private entity. The listed company pays royalty to that entity for using its own brand. Royalty rates of 1% to 5% of revenue can extract enormous sums from a company over time without ever touching the profit line in an obvious way. It looks like a normal expense.

7. Acquire a struggling promoter business at a high valuation

The promoter owns a private business that is failing or marginal. The listed company "acquires" it at a generous valuation. The emi-payments-cash-flow">cash flows out of the listed company and into the promoter family, while the listed company is left absorbing the underperforming asset. Synergy claims are made. They rarely materialise.

An RPT is rarely a single big theft. It is a slow drip out of the listed company into the private side of the same family.

How SEBI rules try to stop these RPT abuses

The SEBI Listing Obligations and Disclosure Requirements (LODR) regulations have tightened RPT rules considerably:

• Material RPTs (above 10% of consolidated turnover or 1,000 crore, whichever is lower) require prior shareholder approval
• Promoters and related parties cannot vote on these resolutions
• infosys-whistleblower-governance-case-study">Audit committee must review and approve all RPTs in advance
• Half-yearly disclosure of RPTs above specified thresholds is mandatory

The official LODR text and updated thresholds are published on the SEBI website. The rules are stronger than ever, but enforcement still depends on minority shareholders watching closely.

Warning signs every retail investor should learn

Before you buy any company with a controlling promoter, scan three places in the annual report:

1. Note on related party transactions — check totals, growth rates, and party names
2. Audit committee report — read what the committee said about RPT pricing and arm's-length tests
3. Voting results — see whether previous RPT resolutions passed only because of promoter votes, with minority shareholders voting against

Patterns that should make you cautious:

• RPT volumes growing faster than overall revenue
• New related parties added each year
• Royalty or brand fees expressed as percentage of revenue (rather than fixed amount)
• Frequent corporate guarantees outstanding to promoter entities
• Independent directors with long tenure or close personal links to the promoter family

What you can do as a minority shareholder

Minority shareholders have more power than they use. The simplest moves:

• Vote on every RPT resolution — even small "no" votes show up in the disclosure
• Read proxy advisor reports (InGovern, IiAS, SES) before annual meetings
• Raise concerns through the company's nse-and-bse/steps-file-grievance-nse-bse">investor grievance email — these are tracked and often answered
• Sell early when RPT patterns deteriorate — minority shareholders rarely get a second chance once value extraction accelerates

Final word — RPTs are governance's pressure point

Most other governance failures (auditor capture, opaque accounting, fake disclosures) eventually surface through RPTs. They are where the promoter touches money that legally belongs to all shareholders. A clean RPT track record is one of the best signals of a well-run Indian listed company. A messy one is one of the loudest warnings — louder than any single quarterly miss or executive change.