The Invisible Transaction: Business Allocation As A Related Party Transaction Under Regulation 23 Of The LODR Regulations

I. Introduction

Related Party Transactions (“RPTs”) are a commercial reality in every corporate group structure, and the law has long recognized that such transactions between related parties carry an inherent risk that value may be transferred away from a company and its shareholders without adequate oversight or disclosure.

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) and the Companies Act, 2013 (“Act”) together address this risk for listed companies and their shareholders through a layered governance and compliance architecture. This architecture has worked reasonably well for conventional transactions such as supply contracts, service arrangements, and asset transfers, where a stated price provides the value against which the materiality test can be applied.

However, the harder regulatory question arises when value moves between related parties through a mechanism that carries no price and may not resemble a transaction in a conventional sense. A group may decide that one entity will operate in certain geographies and another in others, that one company will retain legacy customers while another pursues new business, or that a product line will be assigned to one entity while another steps away. No asset may be formally conveyed, no consideration may be stated, and the arrangement may be presented internally as operational rationalization or synergy optimization. Yet the listed entity may have given up earning capacity, customer relationships, territorial goodwill, and future cash flows in favour of a related party, while its public shareholders may have no way of knowing that this has occurred, or whether what was given up was fairly compensated.

Such arrangements are commonly referred to as business allocation transactions, and they raise two questions that the existing compliance framework had not clearly resolved: whether a transaction involving business allocation constitutes an RPT under Regulation 23 of LODR Regulations at all, and if it does, how its value is to be determined for the purpose of materiality testing when no consideration has been stated. Both questions came before the Securities Appellate Tribunal’s three-member bench in Linde India Ltd. v. SEBI (Appeal No. 527 of 2024), decided on December 5, 2025 (“Linde”), and the Tribunal’s answers have provided the necessary inoculation for this analysis.

II. The Legal Framework

Regulation 2(1)(zc) defines a related party transaction as a transaction involving the transfer of resources, services or obligations between a listed entity or its subsidiary on the one hand and a related party on the other, regardless of whether a price is charged. The scope of this definition is deliberately kept broad; it makes clear that the presence or absence of ‘price’ is irrelevant to determining whether an arrangement qualifies as an RPT. An arrangement structured without any monetary consideration is therefore not outside the RPT framework; it is squarely within it, and the compliance obligation is anchored to the movement of value, not the presence of a price.

Regulation 23(1) of the LODR Regulations requires a listed entity to formulate a policy on the materiality of RPTs and on the manner of dealing with them, with the proviso setting out the operative materiality threshold: a transaction with a related party is material if it, individually or taken together with previous transactions during a financial year, exceeds the thresholds specified in Schedule XII of the LODR Regulations as per the last audited financial statements of the listed entity.

Regulation 23(2) requires prior audit committee approval for all RPTs and any subsequent material modifications, while Regulation 23(4) requires prior shareholder approval, with related parties excluded from voting, for material RPTs.

Section 188 of the Act regulates specified categories of contracts between a company and its related parties, including sale, purchase, lease, services, agency, and underwriting, and permits an exemption from the shareholder approval requirement for transactions in the ordinary course of business conducted on an arm’s length basis. However, as the SAT correctly held in Linde, Section 188 is a general company law provision applicable to all companies, whereas Regulation 23 of the LODR Regulations is a specialized regime for listed entities that imposes higher standards of disclosure and shareholder protection. The arm’s length and ordinary course exemptions available under Section 188, therefore, do not dilute the compliance obligations under Regulation 23 of the LODR Regulations, and a listed entity cannot rely on Section 188 to bypass the materiality testing and approval requirements that Regulation 23 imposes.

III. The Aggregation Question: What SAT Decided and Why It Is Correct

The central interpretive dispute in Linde was whether materiality under the proviso to Regulation 23(1) of the LODR Regulations is to be tested by aggregating all transactions with a related party during a financial year, or only transactions arising under a single contract. Linde India Limited (LIL) argued for the latter, drawing on the language of Regulation 2(1)(zc) of the LODR Regulation, which states that a “transaction” with a related party shall be construed to include “a single transaction or a group of transactions in a contract,” and contending that this definitional language confined the aggregation exercise to transactions within one contract.

SAT rejected this interpretation on straightforward textual grounds, holding that Regulation 2(1)(zc) is a definitional provision that explains what a related party transaction means in a generic sense, and is not the machinery provision for materiality testing, which is independently and elaborately provided in Regulation 23 itself. The proviso to Regulation 23(1) uses the phrase “transaction(s) to be entered into individually or taken together with previous transactions during a financial year,” and there is no textual basis in that language for confining the aggregation to transactions under a single contract. The Presiding Officer, in his separate but concurring opinion, added that accepting LIL’s construction would mean that each individual transaction between related parties would be the unit of assessment, and such an outcome is not only contrary to the plain language of the proviso but would also render the entire purpose of Regulation 23 susceptible to easy circumvention through disaggregated contracting.

SAT’s finding was further reinforced by LIL’s own prior conduct, which proved fatal. In the explanatory statement accompanying the notice for LIL’s 85th AGM, the company had expressly stated that the aggregate of all transactions entered into during any financial year with Praxair India Private Ltd. (PIPL)  and Linde South Asia Services Private Ltd. (related parties of LIL) may meet the materiality criteria under Regulation 23, and had accordingly sought omnibus shareholder approval for all such transactions over three financial years, with aggregate limits set for each related party.

That approval was rejected by the public shareholders of LIL, following which LIL changed its position and argued that the 85th AGM notice had been driven solely by anticipated breaches of specific sub-limits under Section 188 and Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, rather than by LODR compliance concerns. SAT rejected this explanation, noting that the explanatory statement itself had explicitly referenced Regulation 23 of the LODR Regulations and the 10% consolidated turnover threshold, and that no contemporaneous board or audit committee records the revised narrative.

The practical stakes of this holding are considerable. LIL had executed 45 separate contracts with PIPL covering 45 locations, each of which individually did not cross the materiality threshold, which meant that the single-contract approach would have allowed the entire volume of RPT exposure to remain permanently below the threshold for shareholder approval simply through the mechanism of disaggregated contracting. SAT correctly held that such a construction would defeat the protective purpose of Regulation 23, and that all transactions with a specific related party during a financial year must be aggregated for materiality testing regardless of the number of contracts through which they are structured.

IV. Business Allocation as Transfer of Resources: The Valuation Holding

SEBI, in its order (challenged before the SAT), directed NSE to appoint a registered valuer to assess the value of the business foregone and received by LIL under the JV and shareholders’ agreement. LIL challenged this on two grounds: first, that the business allocation did not constitute a transfer of resources, services or obligations within the meaning of Regulation 2(1)(zc) because it involved only prospective and speculative future business opportunities rather than existing tangible assets; and second, that future business is incapable of being valued with any meaningful precision.

SAT rejected both arguments. On the first ground, the Tribunal noted that before the allocation took effect, LIL and PIPL were operating as independent commercial undertakings in overlapping geographies and product lines, each with its own manufacturing and distribution facilities, goodwill, brands, existing order books, customer relationships, and business plans for the future. Through the allocation, LIL exited South, Central, and certain parts of West India, and the production of certain product lines, without receiving any monetary consideration, while PIPL correspondingly exited East, North, and certain parts of West India in LIL’s favour. The Tribunal held that this amounted to a transfer of a profit-making apparatus from one entity to another, encompassing tangible infrastructure, intangibles such as goodwill and brand presence, existing order books, and future cash flows, and therefore clearly constituted a transfer of resources or obligations under Regulation 2(1)(zc). The argument that the arrangement involved only speculative future opportunities was factually inconsistent with the position that both LIL and PIPL were already generating revenue in the relevant regions at the time of the agreement.

On the second argument, the Tribunal referred to standard business transfer and M&A practice, noting that valuations involving future cash flows are routinely conducted in business transfers, mergers and acquisitions, and corporate restructurings, with the Discounted Cash Flow (DCF) methodology being among the most widely accepted approaches. The fact that a business allocation agreement does not state a price does not make the underlying business incapable of valuation.

The Tribunal also made a significant practical observation: even if LIL’s single-contract argument on aggregation were accepted, it would not have assisted LIL on the valuation direction, because the business allocation was itself contained in one single agreement. The Regulation 23 materiality test would still apply to that single agreement, and its value would still need to be independently determined.

V. The Structural Points Linde Leaves Open

That being said, the decision itself leaves certain structural questions which are unanswered. These are not gaps in the ratio; these are questions that the ratio’s own logic raises but does not resolve.

1. The first concerns the threshold between allocation and transfer. SAT’s findings rested on a specific factual foundation, as LIL and PIPL were already operating as independent commercial undertakings in the relevant geographies and product lines at the time of the allocation. Each had its own manufacturing infrastructure, customer relationships, order books, and goodwill. It was the exit from an existing operational presence without any price that led the Tribunal to characterise the arrangement as a transfer of a profit-making apparatus. Where a listed entity agrees to forgo a business segment or territory that it has not yet entered, what would become of the Tribunal’s reasoning in Linde? Whether such an arrangement would constitute a transfer of resources, services or obligations under Regulation 2(1)(zc) will require analysis on its own facts. Linde does not provide a bright-line test for that determination, and the answer will turn on the specific commercial circumstances of each case.
2. The second issue concerns the basis for materiality assessment, where a business allocation involves an exchange of value on both sides. While SAT directed valuation of the business foregone and the business received, it did not clarify whether the Regulation 23 threshold should be tested against the gross value of the business surrendered by the listed entity, the gross value of the business received, or the aggregate value (i.e. net value of the reciprocal allocation). In arrangements in which each party relinquishes certain business opportunities and acquires others, these approaches may yield materially different outcomes. The judgment, therefore, leaves open an important interpretive question regarding the appropriate measurement basis for applying the materiality threshold in reciprocal business allocation arrangements.
3. The third issue concerns valuation methodology and the timing of valuation. Although the Tribunal referred to the discounted cash flow (DCF) method as a commonly used valuation approach, it did not prescribe DCF or any other methodology as the exclusive standard. This is consistent with the nature of valuation itself, which is not a mechanical exercise capable of producing a single universally correct answer. Rather, the outcome depends on a range of variables, including the valuation date, methodology adopted, underlying assumptions, financial projections, discount rates, risk adjustments, comparable market data, and the specific commercial characteristics of the business being valued. Timing is therefore not a separate consideration but a fundamental component of the valuation exercise, particularly where a business allocation is implemented at one point in time while its economic consequences are expected to unfold over several years. While Linde confirms the necessity of valuing such arrangements, it leaves open important questions regarding the valuation date, methodology, and assumptions that would be appropriate for applying the Regulation 23 framework to a business allocation that carries no ‘price’.

VI. The Broader Governance Question: What Lies Beyond the Aggregation Principle?

The significance of Linde extends beyond the specific business allocation arrangement that was before the SAT. The decision provides an opportunity to examine whether the architecture of Regulation 23 of the LODR Regulation, while effective in measuring the scale of related party dealings, is equally equipped to assess their commercial substance.

Regulation 23, as interpreted in Linde, adopts a value-based aggregation approach under which all transactions with the same related party during a financial year are pooled into a single materiality threshold. This approach effectively captures the overall quantum of related party exposure and prevents the fragmentation of transactions to avoid shareholder oversight. However, this focus on value as the trigger for approval should not be taken to mean that the commercial substance of the underlying transaction can be ignored.

This is because Regulation 23 performs two distinct functions. The first function is to require every related party transaction to be placed before the audit committee for approval, and it is at this stage that commercial soundness and fairness are meant to be examined, though the Regulation does not, and perhaps cannot, codify every aspect of fair dealing that the audit committee may need to assess. The second function is to determine, through value-based aggregation, whether a transaction is significant enough to additionally require shareholder approval.

This practical position is also reflected in the manner in which listed companies generally evaluate related party transactions. Although price or value remains the primary reference point for approval thresholds and arm’s length assessment, the review is not usually limited to price alone. Well-governed listed companies through their audit committees typically conduct a qualitative assessment of the transaction first, examining the nature of what is being supplied, received, or foregone, and it is on the basis of that assessment that they determine whether the stated price or value is justified. Qualitative and quantitative scrutiny are therefore complementary exercises, as price can be meaningfully tested only after the commercial substance of the transaction has been properly understood.

Regulation 23 should not be understood merely as a mechanism for obtaining a shareholder vote for all related party transactions which breach the materiality threshold; it forms part of the broader governance regime established under the LODR Regulations and must be read alongside the foundational principles in Regulation 4, including transparency, accountability, fairness, timely disclosure, board oversight, and the protection of stakeholder interests.

In this regard, the audit committee’s function is not confined to noting the existence and value of a transaction but extends to examining whether the transaction is commercially justified and fair to the listed entity, an exercise that falls squarely within the commercial wisdom audit committees are expected to bring to related party oversight. While the law prescribes the materiality threshold as the trigger for shareholder approval, it is the implicit duty of the audit committee to satisfy itself, at the first stage itself, that the commercial rationale, pricing basis, and fairness of the transaction are in order.

VII. Conclusion

The decision in Linde resolves two important questions that had generated significant compliance uncertainty for listed entities. First, materiality under Regulation 23 is not assessed on a contract-by-contract basis. Rather, all transactions with the same related party during a financial year must be aggregated for the purpose of determining whether the applicable materiality threshold has been crossed. Second, a business allocation arrangement involving the transfer of a profit-generating business apparatus, including territories, customer relationships, order books, goodwill, product lines, and future cash-flow potential, constitutes a related party transaction within the meaning of Regulation 2(1)(zc), regardless of a price.

Regulation 23 forms part of the broader governance architecture of the LODR Regulations and is designed to ensure that related party dealings are evaluated on the basis of their economic substance rather than their contractual form.  The real objective is not only to capture the quantum of related-party exposure, but also to ensure that the transaction is examined for fair dealing before it becomes irreversible.

The LODR Regulations operate as the pumping valve of listed-company governance, and the Linde decision has confirmed that the valve opens at the right point: when aggregate value with a related party crosses the prescribed threshold, shareholders must be brought in. But a valve placed correctly in the system does not, by itself, tell the audit committee what to examine before that point is even reached. That assessment, of commercial rationale, pricing integrity, and whether what the listed entity receives is genuinely equivalent in value to what it gives up, cannot wait for a regulatory direction or a tribunal order to prompt it. It is a continuous exercise the audit committee owes to the listed entity from the outset, and the Linde decision is best read not as the end of the inquiry into a transaction’s value, but as a reminder of how early that inquiry must begin.

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