Anatomy of a Corporate Tunnel and the Regulatory Blind Spots in Related Party Transactions

This article examines regulatory blind spots in related party transactions under Indian corporate law and proposes reforms to strengthen shareholder protection and corporate governance.

How the tunnel works

A related party transaction happens when a company does business with someone close to its own management or ownership: A Director, a promoter, a subsidiary, a joint venture partner. In an open market, two strangers negotiating a price have no reason to give each other a break. Related parties do not have that friction. A promoter can make his public company buy raw materials at inflated rates from a private firm he owns, or direct it to sell prime real estate to his family trust for a fraction of what it is worth.¹

Company law does not outlaw these deals outright, and it should not. Group companies genuinely share resources, and forcing every intra-group transaction through an adversarial process would be its own kind of waste. The problem is narrower: whenever the two sides of a deal answer to the same person, the price stops being a negotiation and starts being a number someone picked. Disclosure and approval requirements exist to catch that gap before an insider drains value out of a company that public shareholders also own.

The playbook in practice: Three alleged corporate tunnels

The RIL sale: Undervaluation dressed as an arm’s-length deal

Take the sale of Reliance Projects & Property Management Services Limited (RPPMSL). Reliance Industries Limited (RIL) sold its entire equity stake in RPPMSL to Jaipur Enclave (P) Ltd. for Rs 274 crores. According to the disclosure filed with the sale, RPPMSL had contributed Rs 6,412.60 crores to RIL’s consolidated turnover and carried a net worth of Rs 342.45 crores for the financial year ending 31 March 2025. Rs 274 crores works out to 4.27 per cent of that turnover and 80 per cent of that net worth. The disclosure does not state RPPMSL’s net profit, but the turnover figure alone is enough to raise the undervaluation question.

RIL’s April 2026 disclosure² went further and said the buyer, Jaipur Enclave, did not belong to the promoter group, and that the sale was therefore “not a related party transaction” at all. This sits awkwardly next to RIL’s own consolidated related-party disclosure for the half year ended 31 March 2020, where Jaipur Enclave (P) Ltd. appears listed as an Associate.³ The paper trail on the individuals involved adds another layer. Praveen Baser held the Chief Financial Officer (CFO) and key managerial personnel post at Reliance 4IR Realty Development Limited, an RIL group company, before resigning. On 18 July 2024, the Board of Reliance Industrial Infrastructure Limited appointed him CFO there instead.⁴ Public Director Identification Number (DIN) records show Praveen Baser also sits on the Board of Jaipur Enclave (P) Ltd., the buyer.⁵ A subsidiary changing hands for a fraction of its turnover, bought by a company whose Director doubles as a CFO inside the seller’s own group, and formally declared unrelated at the same time: that is the tunnel, filed in plain sight.

Jindal Poly Films and India’s near miss with a class action

Jindal Poly Films Limited (JPFL) ran a version of the same play, at a larger scale. JPFL sold 44.02 crores optionally convertible preference shares to the SSJ Trust,⁶ a promoter group trust, for Rs 66.03 crores. Those shares carried a subscription value of Rs 440.20 crores and an estimated fair market value of roughly Rs 2,300 crores. In a second transaction, JPFL sold redeemable preference shares to a group company for Rs 39.53 crores against a subscription value of Rs 2,500 crores. The National Company Law Appellate Tribunal recorded allegations that JPFL had — “purposefully structured in a manner to bypass the statutory obligations under Rule 23 of the SEBI (LODR) Regulations, 2015 to avoid the materiality threshold.”

Price the shares low enough, and the deal falls under the threshold that triggers mandatory approval from minority public shareholders. JPFL’s promoters priced accordingly.

How the statute enables what it forbids

SEBI’s Rs 10 crores trapdoor

The Securities and Exchange Board of India (SEBI’s) Circular of 13 October 2025 sets out the minimum disclosure a listed entity owes for a related party transaction. Where the transaction does not exceed—

“1% of annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity or Rupees Ten Crore, whichever is lower…”.⁷

The Company only has to give the Audit Committee and shareholders an abbreviated set of details. That is a number, not a standard, and numbers can be engineered around. Keep the price under Rs 10 crores and the fuller disclosure obligation never triggers, which is roughly what JPFL’s preference share sales did. When the deal is too large to fit under that ceiling, as RIL’s Rs 274 crores sale was, the easier route is to argue about the definition of “related party” instead of the size of the transaction. RIL’s own words, that the buyer “does not belong to the promoter/promoter group/group companies”, did exactly that: the declaration took the entire transaction outside SEBI’s disclosure regime, notwithstanding a buyer that RIL’s own 2020 filings called an Associate and a Director who doubled as a group CFO.

The “ordinary course” alibi

Section 188, Companies Act, 2013 restricts related party transactions unless they are entered—

188. Related party transactions.—…in its ordinary course of business other than transactions which are not on an arm’s length basis….

The statute does not define either phrase inside that quotation. The Institute of Company Secretaries of India (ICSI) Guidance Note⁸ admits as much: the Act “does not clearly lay down tests for determining whether a transaction is in the ordinary course of business”, and leaves that call to the Audit Committee or the Board, the very bodies that answer to the promoter proposing the deal. A company can call a subsidiary sale or a loan write-off routine business and, absent a defined test, there is no statutory language to contradict it. JPFL relied on precisely this defence to argue its preference share sales needed no minority shareholder approval. When minority shareholders eventually forced disclosure to the stock exchange, JPFL’s revised letter called the earlier omission an “oversight”.

Ind AS 24 and the compounding escape hatch

The accounting rules fail in a different place: not at the definition stage, but at the penalty stage. Indian Accounting Standard (Ind AS) 24⁹ states that—

“attention is directed to the substance of the relationship and not merely the legal form”.

That is an improvement on the older Accounting Standard (AS) 18¹⁰, which required disclosure only where one party had “the ability to control the other party or exercise significant influence”. Substance over form is the right test on paper. What undoes it is what happens after a company is caught failing it. Section 441, Companies Act allows offences punishable with a fine to “be compounded by the Tribunal”. Put the two provisions together, and a company can hide the substance of a related party transaction under Ind AS 24, get caught, and pay a fee for the privilege.

What the statute should say instead

Every gap examined so far shares the same design flaw: The framework asks insiders to self-report, and asks Boards controlled by those insiders to make the call. Singapore and Hong Kong solve this differently, and Indian law can borrow from both without reinventing the underlying structure.

Fairness opinions as a precondition, not a courtesy

The Hong Kong and Singapore stock exchanges require an independent financial adviser’s fairness opinion before a material transaction goes to a shareholder vote. SEBI should require the same. Under the present regime, the promoter effectively sets the valuation and then structures it to stay under whichever threshold matters. An independent fairness opinion takes that discretion away at the point where it does the most damage, before the price is fixed. SEBI should pair this with immediate, fixed financial penalties for late disclosure.

Defining what “ordinary” actually means

Section 188 exempts transactions made in the “ordinary course of business” and on an “arm’s length basis”, and leaves both phrases undefined. Parliament should fix that with a quantitative definition rather than a descriptive one. Selling a subsidiary, or writing off a loan above a set size, should fall outside “ordinary course” by statutory default, triggering mandatory shareholder approval rather than leaving the Audit Committee to decide. Section 441 needs a matching amendment: offences involving the concealment or manipulation of related party transactions should be carved out of the compounding provision entirely, so a fine stops being an acceptable substitute for disclosure.

Taking the Audit Committee out of the guessing business

The ICSI Guidance Note currently lets the Audit Committee decide whether a transaction is in the ordinary course based on the Company’s own internal policy, which hands the deciding vote to the people closest to the deal. A standardised, industry-wide test would fix this. Audit Committees should be required to obtain a verified, third-party market comparison for every related party transaction, and internal estimates alone should no longer be enough to close the file.

A two-year memory for related parties

AS 18 limits the definition of a related party to entities under direct control or significant influence. Ind AS 24 widens that to substance over form, but companies still route around it by reshuffling executives or trimming ownership stakes just before a sale, then pointing to the reshuffled paperwork as proof the relationship no longer exists. A mandatory 24-month cooling-off period would close that gap: Any entity that shared a key managerial personnel, a Director, or a promoter within the past two years should count as a related party, regardless of what the org chart says on the day of the transaction. Praveen Baser’s move from one RIL group company to another, timed around the RPPMSL sale, comes close to a textbook illustration of the pattern this rule is meant to catch.

None of this requires malice from every Director involved, or a conspiracy stretching across three unconnected matters. It requires a board that answers to the promoter, a threshold with a number instead of a principle behind it, and enough time for a paper trail to look clean before anyone checks. Reforms that simply raise the number, add a compounding fee, or ask companies to try harder will not touch this. The RPPMSL sale and JPFL’s preference shares are not exceptions the current framework failed to catch. They are what the current framework, applied exactly as written, produces. The question for Indian corporate law is no longer whether these loopholes exist. It is whether the shareholders on the other side of these deals will still have a company left to own by the time anyone closes them.