OECD Report on Related-Party Transactions

One area that is yet to receive significant attention in terms of regulatory reforms pertains to related-party transactions (RPTs). This is despite the enormous potential for RPTs in India given the concentrated ownership structures of public listed companies. All of these provide less protection to minority shareholders. In the past, although several suggestions for reform have been made (see for example, the AGCA White Paper on Corporate Governance), they have not been taken up in earnest by the regulators.
A recent report by the OECD titled “Related Party Transactions and Minority Shareholder Rights” embarks on a comparative study of regulations relating to RPTs. India is included among the 5 countries that are studied in-depth in the report (with the other countries being Belgium, France, Israel and Italy).
A summary of OECD’s findings are set out below:
In approving RPTs, great emphasis has been placed on boards’ approval, the tendency being for this task to be given to a committee of independent board members. There are often continuing questions about how to ensure effective independence of board members from controlling shareholders. Three approaches have been taken which represent evolving good practice when there are controlling shareholders. First, in a few jurisdictions shareholders have been given a say in approving certain transactions, with interested shareholders excluded. Second, in several jurisdictions minority shareholders are able to vote directly for a board member of their choosing. Third, in some cases a controlling shareholder has a fiduciary duty to other shareholders and the company. An abusive RPT would be against the interest of non-controlling shareholders and thus represent a breach of duty.
The current emphasis on board’s role in tackling RPTs is true in India as well, although the role of the board is largely to ensure proper disclosure of the RPTs rather than to pre-approve them. However, as far as the three aspects of good practice that are being evolved in jurisdictions, none of them has been adopted in India.

Regulation of RPTs continues to lag behind other areas of reform in corporate governance in India and require greater attention.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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