SAT Reinforces RPT Regime: Aggregation Mandatory for Materiality Thresholds

The Securities Appellate Tribunal (SAT), in its order dated December 5, 2025 (Order, which can be viewed by clicking on this link), has delivered a significant ruling in the matter of Linde India Ltd. v. Securities and Exchange Board of India. SAT dismissed the appeal filed by Linde India Limited (Linde) and upheld the order passed by the Securities and Exchange Board of India (SEBI) dated July 24, 2024 (which can be viewed by clicking on this link).

This ruling serves as a critical affirmation of SEBI’s regulatory intent to close potential loopholes in the approval framework for Related Party Transactions (RPTs), specifically rejecting the “single contract” interpretation for determining RPT materiality thresholds.

1. SAT’s Key Findings and Directions

The key findings of the SAT include, inter alia:

1. 1. Mandatory Aggregation for Materiality: Linde contended that the definition of ‘related party transaction’ in Regulation 2(1)(zc) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations), which refers to “a single transaction or a group of transactions in a contract”, implied that the materiality threshold should be applied only to transactions stemming from a ‘single contract’ or transactions of a similar nature. SAT explicitly rejected this interpretation. SAT held that the proviso to Regulation 23(1) uses the plural term “transactions” and phrases like “individually or taken together with previous transactions,” which necessitates aggregating ‘all’ transactions entered into with a specific related party during a financial year to test materiality.

1. 2. Rejection of the ‘Mischief’ of Disaggregation: SAT observed that accepting Linde’s argument would defeat the very purpose of the regulations. The Presiding Officer noted that allowing a ‘per contract’ threshold would foster ‘mischief’ by enabling entities to structure dealings into multiple smaller contracts (each individually below the threshold) to evade shareholder oversight. SAT emphasized that the law must be interpreted to suppress such evasion, labeling the “per contract” interpretation as one that would lead to “manifest absurdity”.

1. 3. Business Allocation as an RPT: The dispute also involved a Joint Venture and Shareholder Agreement (JV&SHA) between Linde and its related party, Praxair India Pvt. Ltd. (PIPL), which allocated specific geographic regions and products between the two entities. SAT upheld SEBI’s finding that foregoing business in certain regions (e.g., South and West India) in favor of a related party constitutes a “transfer of resources/obligations” and a RPT. SAT characterized this as a transfer of the “profit making apparatus,” including goodwill and future order books, which qualifies as an RPT. Consequently, SAT affirmed SEBI’s direction requiring a valuation of the business foregone to determine if shareholder approval is necessary.

2. Analysis

The Order establishes a decisive precedent on the “substance over form” approach in corporate governance, particularly regarding how RPTs are identified and calculated. A significant aspect of the ruling is the interpretative hierarchy established between definition clauses and charging provisions. SAT clarified that Regulation 2(1)(zc) acts as a generic definition, whereas Regulation 23 serves as the substantive charging provision for compliance. The inclusion of the phrase “in a contract” in the definition was held to be clarificatory, ensuring that a group of transactions within one contract are treated as RPTs, rather than a restrictive clause that overrides the aggregation mandate of Regulation 23. This distinction prevents companies from using definitional nuances to bypass substantive compliance obligations.

Furthermore, the ruling significantly expands the practical scope of what constitutes a “transfer of resources.” By classifying the geographic allocation of future business opportunities as an RPT, SAT has signaled that ‘resources’ are not limited to tangible assets or cash. SAT recognized that “foregoing” a market or a product line in favor of a related party is effectively transferring the “profit making apparatus”. The dismissal of Linde’s argument that future business cannot be valued is equally notable, with SAT affirming the use of methodologies like Discounted Cash Flow (DCF) to quantify such intangibles. This places a burden on listed entities to ensure that even non-monetary strategic agreements are backed by independent valuation reports.

3. Way Forward

Going forward, listed entities would be required to ensure that their RPT monitoring systems aggregate ‘all’ transactions with a single related party across the entire financial year (regardless of contract structures) to determine approval requirements. This could lead to a lot more contracts becoming subject to the ‘majority of minority’ approval framework prescribed for RPTs.

Additionally, Boards of listed entities must exercise extreme caution when approving entry of non-monetary strategic agreements, such as market allocation or non-compete arrangements, with related parties. Such arrangements must be accompanied by independent valuation reports to quantify the “resources” or “opportunities” being transferred, ensuring compliance with the regulatory framework.