[Bhoomi Goenka and Saksham Gupta are 3rd year B.B.A., LL.B. (Hons.) students at National Law University Odisha]
Related party transactions (RPTs) have long occupied a central place in debates on Indian corporate governance, as they present a persistent structural dilemma in which such transactions are often necessary for efficient business operations while simultaneously functioning as a primary channel for value diversion, conflicts of interest, and the erosion of minority shareholder wealth. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) were designed to address this risk through a framework built on enhanced disclosure obligations and stringent shareholder approval requirements, particularly when transactions cross prescribed materiality thresholds.
However, the recent ruling of the Securities Appellate Tribunal (SAT) dated December 5, 2025, in Linde India Limited v. Securities and Exchange Board of India (5 December 2025) has gone beyond mere interpretation of these regulations and has fundamentally reshaped their application. By upholding enforcement action of the Securities and Exchange Board of India (SEBI), SAT affirmed two crucial principles: first, that the materiality of RPTs must be assessed by aggregating all transactions entered into with a single related party, and second, that strategic and territorial allocations within joint venture arrangements themselves qualify as “transactions” warranting regulatory scrutiny. This ruling marks a significant inflection point in the evolution of India’s RPT framework, as it reflects a decisive shift from form to substance by privileging economic reality over formal contractual characterisation. Yet, as the implications of this decision begin to unfold, a broader and more unsettling concern emerges, namely whether, in its pursuit of substantive regulatory objectives, the tribunal has inadvertently introduced a degree of uncertainty into the compliance landscape for listed companies.
Aggregation as an Anti-Avoidance Mechanism
At the heart of the dispute lay the mechanics of calculating materiality, with the company arguing that its various transactions with related parties, including Praxair India Private Limited, ought to be assessed individually, since under this approach each separate contract or arrangement remained below the materiality threshold prescribed under regulation 23 of the LODR Regulations and therefore did not trigger the requirement of prior shareholder approval.
SEBI, and subsequently SAT, rejected this isolated and compartmentalised approach in favour of a more comprehensive assessment, holding that materiality must be determined by aggregating all transactions, whether relating to the supply of goods, services, or other arrangements, entered into with a single related party during the course of a financial year. What renders this ruling particularly notable is the fact that regulation 23 does not expressly mandate aggregation in clear or unequivocal terms, and SAT’s reasoning therefore reflects a purposive rather than a strictly literal interpretation of the provision. The Tribunal recognised that a transaction-by-transaction evaluation creates scope for regulatory arbitrage through “structuring”, enabling companies to fragment an economically significant arrangement into smaller, ostensibly non-material components, thereby allowing formal compliance with the letter of the law while facilitating the transfer of substantial value to a related party without meaningful shareholder oversight.
Viewed in this context, the aggregation requirement operates as a necessary anti-avoidance tool, as it compels companies to assess materiality on the basis of their total economic exposure to a related party rather than the nominal value of individual invoices, a position that aligns closely with the broader securities law principle of substance over form. At the same time, this approach introduces an added layer of operational complexity, since aggregation transforms materiality from a static, point-in-time assessment into a cumulative and evolving threshold, where a transaction that appears compliant in the first quarter may, by the end of the financial year, become part of a material grouping, effectively creating a moving target for compliance officers tasked with ongoing regulatory monitoring.
Strategic Arrangements and the Expanding Definition of “Transaction”
While the aggregation ruling addresses a procedural loophole, the real shift lies in SAT’s treatment of strategic business allocations, as the Tribunal supported SEBI’s view that decisions relating to territorial exclusivity and the allocation of business segments in joint ventures constitute RPTs. Traditionally, the corporate world has viewed such arrangements as high-level governance or operational decisions, understood as abstract agreements that dictate how business is conducted rather than as “transactions” involving an exchange of funds, but SAT’s endorsement breaks this distinction by applying an effects-based understanding of what constitutes a transaction.
The reasoning stems from the economic idea of opportunity cost, since when a listed entity agrees not to operate in a specific territory or pursue a particular business line to accommodate a related party, as is common in joint venture non-compete clauses, it is effectively transferring the potential market value of that opportunity to the related party. Therefore, under the old view, a transaction required money to change hands, whereas under the new view, a transaction occurs whenever an economic advantage is conferred. Territorial restrictions and market allocations significantly affect a company’s competitive position, revenue potential, and long-term profitability, and from an economic standpoint, granting a related party exclusive territory is equivalent to transferring the cash flows from that area. By bringing these non-monetary arrangements within the RPT framework, SAT has strengthened minority shareholder oversight by ensuring that these “invisible” value transfers are subjected to the same rigorous approval processes as standard contracts for goods or services.
The Valuation Vacuum: Where Governance Meets Guesswork
While the broader definition of RPTs is justifiable, it exposes a serious weakness in the existing regulatory framework, namely the absence of valuation standards for non-monetary arrangements. If a strategic arrangement such as a territorial restriction is now deemed to be a material RPT, the immediate question is how its value is to be calculated, particularly since unlike a contract for raw materials with a clear invoice value, a strategic concession is inherently intangible in nature. Whether the value of a territorial restriction to be assessed on the basis of the projected revenue of the lost market, or according to the gains accruing to the related party, or through a discounted cash flow analysis of missed opportunities, are questions to which the ruling provides no answers.
This lack of guidance creates a dangerous “valuation vacuum”, as without clear metrics, compliance risks becoming dependent on hindsight, with SEBI potentially determining at a later stage that a strategic decision was “material” based on the subsequent performance of the related party in that territory, thereby exposing the board of directors to liability where accurate ex ante valuation was not possible. This uncertainty forces boards to attempt to value what is inherently difficult to quantify and places directors in a precarious position, where they are required to seek shareholder approval for arrangements with no clear price tag using valuation methodologies that may later be contested by regulators, leaving unresolved the tension between the ruling’s substantive objective of capturing all value transfers and the practical challenge of valuing them accurately.
Compliance Implications for Boards and Audit Committees
This ruling significantly raises the compliance requirements for listed entities, particularly those operating within complex conglomerate structures or through joint ventures, effectively signalling that the era of purely “tick-box” compliance has come to an end.
- Holistic Oversight: Audit committees can no longer confine their oversight of RPTs to traditional contracts for the supply of goods, services, or financing, as they are now required to examine the strategy itself and evaluate strategic frameworks, territorial arrangements, and exclusivity agreements through the lens of materiality.
- Cumulative Tracking Systems: Companies are required to develop robust internal control systems to monitor cumulative exposure to related parties, a task that goes beyond straightforward accounting and becomes a broader data governance challenge, since such systems must be capable of flagging when the aggregate value of multiple distinct transactions with a single related party approaches the prescribed materiality threshold over the course of a financial year.
- Reassessing Legacy Agreements: Companies must urgently review legacy joint venture agreements, many of which contain standard non-compete or territorial clauses drafted years earlier, as under the new interpretative approach these ostensibly dormant provisions may now be viewed as active and recurring RPTs that continue to accumulate “value” each year, requiring boards to assess whether such legacy arrangements now necessitate fresh shareholder approval.
Conclusion
This shift does more than reinterpret compliance, it redraws the boundary between business judgment and shareholder accountability. Decisions once treated as matters of commercial strategy may now require the same transparency and justification as financial transactions, effectively placing boardroom discretion under a sharper governance lens. If handled well, this evolution could elevate governance standards by forcing deeper scrutiny of how value is created, shared, or foregone within corporate groups; handled poorly, it risks breeding hesitation, where directors prioritise regulatory defensibility over commercial boldness. The difference will lie not in further litigation, but in whether regulatory guidance emerges to translate this expanded vision into workable compliance norms. Until then, boards are left operating in a space where the absence of a price tag does not mean the absence of value, and where the true measure of governance will be how convincingly they can explain the economic fairness of their choices.
– Bhoomi Goenka & Saksham Gupta