Related Party Transactions and the Illusion of Disclosure
Introduction
Corporate governance today is built on a simple promise: transparency. If shareholders are informed about what the company is doing, they can protect themselves. Related Party Transactions (RPTs) operate on this very assumption. They are not prohibited. Instead, the law assumes that disclosure and approvals will be enough to prevent abuse.
On paper, this looks reasonable. Annual reports are full of disclosures, board approvals are recorded, and compliance boxes are ticked. Yet, despite this apparent transparency, concerns persist about the misuse of RPTs, particularly in companies with concentrated ownership. This raises a troubling question: if disclosure exists, why does protection often feel absent?
This article examines how RPT regulation relies heavily on disclosure, and how that reliance can sometimes create only an illusion of accountability.
What Are Related Party Transactions?
Related Party Transactions are transactions entered into by a company with parties that already share a pre-existing relationship with it. These parties may include promoters, directors, key managerial personnel, or entities controlled by them. Because of this relationship, such transactions naturally raise concerns of conflict of interest.
Importantly, RPTs are not illegal. In fact, many of them are commercially necessary. Companies may borrow from promoter-linked entities, lease property from group companies, or provide guarantees within corporate groups. The problem is not the transaction itself, but the possibility that it may be structured to benefit insiders at the expense of minority shareholders.
To address this risk, company law does not ban RPTs. Instead, it seeks to regulate them through transparency and oversight.
The Promise of Disclosure and Approval
The regulatory framework governing RPTs is based on a clear idea: informed scrutiny will prevent abuse. Requirements such as board approval, audit committee oversight, and shareholder disclosures are designed to ensure that transactions are transparent and subject to scrutiny.
In India, disclosure norms under corporate governance frameworks, such as Clause 49, and accounting standards, like AS-18, were designed to help investors understand not just that a transaction occurred, but also its nature. The theory is straightforward. Once related transactions are disclosed, shareholders and the market can react, question, or discipline management.
In this sense, disclosure is treated as a substitute for direct control. The law assumes that transparency itself acts as a safeguard.
Where the System Starts to Leak
This assumption begins to weaken when ownership structures are taken seriously. Empirical studies, including one published in the NLSIU Law Review, show that promoter ownership in Indian companies is often extremely high. In the BSE 100, the average promoter holds more than 48% of the company. In the broader BSE 500, the figures are similar, with very few companies having promoter shareholding below the critical 25% threshold.
This concentration of ownership changes how disclosure operates in practice. When promoters control voting power, approvals become formal rather than substantive. Shareholder consent may exist, but it is effectively guaranteed. Boards, often influenced by promoter interests, may approve transactions that are technically compliant but commercially questionable.
Further, disclosure itself is often minimal. Indian law frequently allows transactions to be disclosed in broad terms. For instance, a loan given to a director may be disclosed simply as a “loan to related party,” without detailing interest rates, repayment terms, or comparative market conditions. In contrast, jurisdictions like the United States require far more granular disclosure, forcing companies to reveal the substance of the transaction, not just its existence.
As a result, compliance begins to look pro forma. Statements mimic statutory language, disclosures mirror checklist requirements, and meaningful understanding is lost.
The Illusion of Disclosure
This is where the illusion emerges. On paper, the system appears transparent. Disclosures are made, approvals are recorded, and governance frameworks appear to be intact. But transparency without effective scrutiny does little to restrain power.
When promoters dominate ownership, disclosure does not empower minority shareholders; it merely informs them of decisions they cannot realistically challenge. Information is provided, but control remains concentrated. What appears to be accountability is often merely formal compliance.
In such a system, legality and fairness quietly drift apart. Transactions remain lawful, disclosures remain accurate in form, yet the underlying concern of value extraction through related parties persists.
Conclusion
Related-party transactions reveal a deeper limitation of governance through disclosure. Transparency is necessary, but it is not sufficient. When power is heavily concentrated, disclosure risks becoming a procedural ritual rather than a protective mechanism.
This does not mean that disclosure frameworks are useless. They provide visibility and create records. But treating transparency as a complete safeguard ignores the realities of ownership and control, particularly in promoter-driven corporate structures.
The challenge, therefore, is not the absence of rules but the overconfidence placed in them. Without addressing how power actually operates within companies, disclosure may continue to look reassuring while offering little real protection.
If this gap between formal consent and real protection interests you, you may want to read When “I Agree” Loses Its Power, which explores the same problem in digital contracts.
