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June 2024

Related Party Transactions: The Purpose & Effect Test

By Dr. Anup P. Shah, Chartered Accountant
Reading Time 15 mins

INTRODUCTION

Related Party Transactions (“RPTs”) are a very significant matter for listed companies. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“the LODR”) have laid down strict guidelines on how listed companies should deal with RPT. The idea always is that the minority shareholders of the listed entity should be protected and not be put at a disadvantage in any manner. The LODR has undergone a fundamental change with the introduction of the Purpose and Effect Test for RPTs. Let us examine what are the consequences of this change.

WHO IS A RELATED PARTY?

As per Regulation 2(zb) of the LODR, a “related party” means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards. S.2(76) defines the following persons as a related party for a company:

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a direc

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