SEBI RPT Reforms: What They Mean for Ind AS 24 and Auditors
Related-party transactions (RPTs) have always been a grey zone in corporate governance. A promoter group company buys goods from the listed entity at prices that look perfectly normal — until you dig deeper. That is precisely why SEBI keeps revisiting its RPT framework under the LODR (Listing Obligations and Disclosure Requirements) Regulations.
A SEBI panel has recently proposed a dual-track approach: simplify procedural compliances for routine, genuinely arm's-length dealings, while tightening scrutiny on transactions that benefit promoters or their related entities. For CA students — especially those sitting for Intermediate or Final — this topic sits right at the junction of Corporate Laws, Auditing and Ind AS 24. Let us unpack it layer by layer.
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What the SEBI Panel Is Reportedly Proposing
(Note: verify the latest version of proposals in official SEBI circulars / ICAI announcements, as regulatory positions can change quickly.)
The broad thrust of the proposed reforms has two sides:
Side 1 — Easier Rules for Routine RPTs
- Smaller, repetitive transactions with unrelated commercial logic may be batched under a single omnibus approval rather than requiring case-by-case shareholder votes.
- The approval threshold for ordinary course of business transactions may be relaxed so companies are not bogged down in procedural delays.
- This is good for operational efficiency but does not reduce disclosure obligations under Ind AS 24.
Side 2 — Tighter Checks on Promoter Deals
- Transactions where the counterparty is a promoter, promoter-group entity or a person who can exercise significant influence may need enhanced disclosure and independent director certification.
- Related-party shareholders (the promoters themselves) may be barred from voting on approvals of transactions that benefit them — strengthening the concept of interested-party abstention.
- Audit committees would get a more active gatekeeping role, with a requirement to justify why a transaction is truly arm's-length.
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Why Ind AS 24 Still Remains the Backbone
SEBI's LODR framework governs approval and voting mechanics. Ind AS 24 — Related Party Disclosures — governs what must be reported in financial statements. These two operate in parallel, not in isolation.
Under Ind AS 24, remember these core ideas:
- A related party includes key management personnel, their close family members, entities controlled or jointly controlled by them, and entities over which they exercise significant influence.
- Every material related-party transaction must be disclosed: the nature of the relationship, the transaction amount, outstanding balances and any provisions for doubtful debts.
- Compensation of KMP (short-term benefits, post-employment benefits, share-based payments, etc.) must be disclosed in aggregate categories.
- The standard specifically says you cannot claim transactions are at arm's length without supporting evidence. Merely stating it is not enough.
Even if SEBI simplifies procedural approvals, Ind AS 24 disclosures in the annual financial statements remain mandatory and unchanged. Auditors need to check both tracks.
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What This Means for Auditors
If you are preparing for CA Final — Auditing or Strategic Financial Management — pay close attention here.
The auditor's responsibility does not shrink when rules become procedurally easier. In fact, it arguably grows, because:
- Risk of camouflage increases — When routine transactions get bundled approvals, individual transactions become harder to isolate and examine. Auditors must design specific substantive procedures to test pricing, terms and commercial substance.
- SA 550 (Related Parties) requires auditors to evaluate whether management has identified all related parties and whether the financial statements disclose RPTs adequately. Under a reformed regime, auditors must be alert to transactions that may have shifted categories (from promoter-flagged to routine) to avoid enhanced scrutiny.
- Reviewing audit committee minutes becomes more critical. If an audit committee signed off on a bundled omnibus approval, the auditor must evaluate whether the committee actually exercised independent judgment or simply rubber-stamped.
- Fraud risk — SA 240 requires auditors to remain alert to fraud. Related-party arrangements — especially those structured to transfer value to promoter entities — represent a classic fraud risk area. Pricing below market, loans without commercial justification, and circular transactions are all red flags.
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Audit Committee Oversight: The New Pressure Point
Under the proposed changes, audit committees would effectively become the primary filter for RPT approval — especially for promoter-linked deals. For CA students, this is an excellent exam topic:
- Composition matters: An audit committee dominated by independent directors with financial expertise is better placed to question promoter deals objectively.
- The audit committee must review: the rationale, pricing basis (comparable uncontrolled price, cost-plus, or resale price method), and whether the transaction serves the listed company's interest or only the promoter's.
- Documentation: The committee must maintain robust minutes. Auditors will rely on these minutes as audit evidence.
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A Simple Logic Example to Understand Arm's-Length Pricing
Imagine Listed Co. purchases raw material from Promoter's Private Co. at ₹500 per unit. The market rate for the same material from unrelated suppliers is ₹380 per unit.
- Is this disclosed as an RPT under Ind AS 24? Yes — mandatory.
- Should the audit committee have flagged this? Absolutely.
- What must the auditor do? Obtain the market price evidence, document the ₹120 per unit excess, assess whether there is a commercial justification (e.g., superior quality, guaranteed supply), and evaluate whether the financial statement disclosure is adequate.
- If there is no justification, this could signal a related-party abuse — the auditor must consider its impact on the audit opinion.
This kind of logical reasoning is exactly what ICAI tests in scenario-based questions.
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Key Takeaways for Your Exam Preparation
- SEBI's LODR reforms and Ind AS 24 work in parallel — never confuse governance approval with accounting disclosure.
- SA 550 and SA 240 together form the auditor's toolkit for related-party risk.
- Audit committee independence is not just a governance ideal — it is a testable concept with practical implications.
- Always verify current thresholds and approval limits in the latest ICAI study material and SEBI circulars before answering exam questions.
- Tighter promoter-deal scrutiny increases audit risk, not decreases it — a point many students miss.
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FAQs
Q1. Does a simpler SEBI approval process mean fewer disclosures under Ind AS 24? No. Ind AS 24 disclosures in financial statements are independent of SEBI's approval mechanics. Even if a transaction gets a bundled omnibus approval under LODR, it must still be individually disclosed in the notes to accounts if it is material.
Q2. Under SA 550, what is the auditor's first step when a related party is identified? The auditor must assess whether the financial statements have properly identified and disclosed all related parties and transactions. The auditor then designs substantive procedures to verify the terms, pricing and commercial substance of those transactions — not just accept management representations at face value.
Q3. Can an audit committee approve an RPT even if independent directors disagree? This depends on the specific regulations in force — verify in the latest SEBI LODR circulars. However, conceptually, a dissent by independent directors is a serious governance signal. Auditors must note such dissents, evaluate their reasons and consider whether the financial statements reflect the true and fair view of the transaction.
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