SEBI’s New RPT Norms – A Paradigm Shift in Corporate Governance

 SEBI’s revised norms on Related Party Transactions (RPTs), effective from September 1, 2025, represent far more than a procedural update. They signal a fundamental shift in the regulatory philosophy, moving from a disclosure-based regime to one demanding substantive governance and economic justification. This change is set to reshape how corporate groups of various structures conduct their affairs.

Scrutiny for Integrated Business Models

For manufacturing and infrastructure groups that rely on backward integration through captive vendors or back-to-back contracts, the new norms introduce a heightened level of scrutiny. The mere fact that pricing is fair may no longer be sufficient. The "optics" of these transactions and the robustness of their documentation will be paramount. Audit Committees are now empowered and expected to demand concrete evidence, third-party benchmarking, and a clear commercial rationale, moving beyond broad, high-level explanations.

Governance Overhaul for Indian Subsidiaries

The landscape for Indian subsidiaries of listed companies is also transforming. Common intra-group arrangements—such as royalty payments, shared services, and corporate cost allocations—which previously often passed without rigorous challenge, will now require enhanced transparency. Boards will be compelled to prioritize substance over legal form. For many such subsidiaries, this necessitates a fundamental re-evaluation of their governance practices to maintain comfort for both the parent company and minority shareholders.

Complexity for Cross-Border Structures

The challenges are magnified for groups with a listed foreign parent and a separately listed Indian subsidiary. RPTs with the foreign parent, including intellectual property charges, corporate guarantees, and cost-sharing agreements, will now face intense scrutiny from Indian regulators. Given that SEBI's requirements are often more granular and demanding than those in many international jurisdictions, these companies must establish robust, defensible valuation and benchmarking frameworks as a standard operating procedure.

My View: The New Imperative of Arm's Length Governance

In essence, the new framework demands that related party economics be justified as if the counterparty were an independent, third-party entity. The convenience of group structures will no longer be a valid justification. The future will be driven by stronger governance, crystal-clear disclosures, and impeccably defensible documentation to secure board approvals and, crucially, shareholder trust.

It is pertinent to note that while Transfer Pricing regulations have long mandated an arm's length principle from a tax perspective, SEBI's framework travels beyond this. It shifts the focus squarely onto economic substance and governance transparency, requiring disclosure of the commercial rationale and the adequacy of information presented to the Audit Committee.

Companies that proactively adapt, revisiting their RPT strategy and strengthening their compliance readiness, will turn this regulatory change into an opportunity to enhance market credibility. Those who resist or delay will inevitably face increasing friction in Audit Committees and shareholder forums, making early preparation not just advisable, but essential.