Building Governance Before Listing: A Missing Piece In Related Party Readiness

Every company on the road to a public listing is expected to be governed as though it were already a listed entity, well before its shares ever trade. Schedule VI Part A of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) requires the offer document to carry a statement confirming that the issuer has complied with the board composition and committee requirements prescribed under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), months before those regulations have any legal application to such company. The audit committee, the nomination and remuneration committee, and the stakeholder’s relationship committee must all be functioning ahead of the very listing that would otherwise make them mandatory.

There is good reason for this. A board and its committees function best when they have had time to settle into their roles before facing the scrutiny that comes with being a listed company, and SEBI’s decision to require this structure at the time of filing the offer document reflects a deliberate and considered approach to investor protection. The period between filing the offer document and the actual date of listing is used as a runway for exactly this purpose, so that investors reading the offer document are assessing a board and committee structure the company will actually carry into its listed life, not one it intends to build only after their money is already in.

A fair question follows from this: has the same attention been given to preparing companies for related party readiness, an area where investor protection matters just as much as board composition?

The moment a company becomes a listed entity, certain individuals and entities that fell outside the related party disclosures made in the offer document, which were prepared on the basis of applicable accounting standards (Ind AS 24/AS 18), suddenly fall within the definition of ‘related party’ set out in Regulation 2(1)(zb) of the LODR Regulations. This means a company can satisfy every governance and disclosure requirement that Schedule VI Part A of the ICDR Regulations demands, and yet still encounter a complication in its first year as a listed entity. Contracts signed before the offer document was even filed, with counterparties who fell outside the accounting-standard test and so never appeared in the related party disclosure, can carry a hidden consequence once the company lists. Any modification, variation, renewal, or fresh transaction under such a contract, entered into after the counterparty comes within Regulation 2(1)(zb), may require audit committee approval and, where applicable, shareholder approval, even though the original contract itself was never a related party transaction at all. This piece asks why that gap exists, and what a company can reasonably do to close it before it ever reaches the listing bell.

A Governance Standard Built for Early Readiness

Schedule VI Part A of the ICDR Regulations requires the offer document to include a statement that the issuer has complied with the requirements of corporate governance relating to the composition of its board of directors and the constitution of committees such as the audit committee, the nomination and remuneration committee, and the stakeholders relationship committee, as provided under the LODR Regulations.

What makes this requirement valuable is that it does not create a lighter or different standard for companies that are not yet listed. The LODR Regulations do not apply to a company until it is listed, yet this statement asks the company to already be compliant with LODR’s board and committee requirements at the offer document stage itself. In practice, a company must put together a properly constituted board and set up its committees while it is still an unlisted company preparing to go public not after listing.ss

This approach is a strong example of readiness-focused securities law framework. It gives companies a clear target to work toward during the IPO process, and it gives investors confidence that governance is not an afterthought bolted on after listing.

However, the requirement only talks about the board composition and committee constitution. It says nothing about any other obligation a company will face under the LODR Regulations once it lists. The same spirit of readiness that shaped this requirement can just as well be extended into other areas of disclosure, one such area being related party transactions. The underlying model, of using the pre-listing period to build toward the post-listing standard, is a sound one, and it offers a template that can be extended further.

Extending the Similar Approach to Related Party Readiness

The related party information an investor sees in an offer document comes from the restated financial statements, prepared under relevant accounting standards (Ind AS 24/AS 18). Such accounting standard usually identifies a related party through control, joint control, or significant influence, typically shown through board representation, involvement in policy decisions, or transactions between commonly controlled entities. Shareholding size on its own, without any accompanying influence/control, does not usually bring a person within the definition of ‘related party’ under such accounting standards.

Once a company lists, Regulation 2(1)(zb) of LODR Regulations builds on this foundation and adds two further categories designed specifically to protect minority shareholders. Anyone belonging to the promoter or promoter group is treated as a related party regardless of shareholding size. Anyone holding ten per cent or more of the company at any point during the preceding financial year is treated as a related party as well, regardless of whether they have any other relationship with the company. Regulation 23 then applies its approval framework to this wider group, requiring audit committee approval and, where applicable, shareholder approval with related parties excluded from voting, once a transaction crosses the materiality threshold as prescribed in the LODR Regulations.

This wider standard under the LODR Regulation exists precisely to strengthen governance once a company is publicly listed and involves public money. The opportunity lies in helping companies arrive at listing already familiar with this standard, in much the same way the ICDR Regulations already familiarise them with LODR’s board governance requirements.

At present, a company’s related party identification exercise during the offer document drafting process is built around the accounting standards test. This means a shareholder holding twelve or fifteen per cent of the company, without a board seat or any other relationship, may not appear in the offer document’s related party disclosure, since bare shareholding does not meet the accounting standard threshold. A promoter group entity may similarly appear elsewhere in the offer document, in the shareholding pattern or promoter group disclosures, without appearing in the related party disclosure itself, since its relationship with the company does not meet the accounting standard’s threshold for control, joint control, or significant influence.

This is where the absence of any pre-listing readiness step starts to matter. Consider a contract the company signed with such a fifteen per cent shareholder before the offer document was even filed, one that never appeared in the related party disclosure. That contract does not change in any way on the day the company lists, and its continued performance in accordance with its existing terms does not, by itself, become a related party transaction merely because the counterparty now falls within Regulation 2(1)(zb). What changes is the company’s exposure going forward, any renewal, amendment, variation, or fresh transaction entered into under that arrangement after listing will need to be assessed against Regulation 23, and may require audit committee approval and, where the materiality threshold is crossed, shareholder approval. A company that has not tested its counterparties against Regulation 2(1)(zb) in advance has no way of knowing this until Regulation 23 already applies to it. A gap of this kind is not, however, unfamiliar territory.

SEBI has already faced a version of the same gap, and it responded by building a bridge rather than leaving companies to work out the consequences on their own. When Regulation 2(1)(zb) was widened in 2021 to include the new shareholding-based test, SEBI issued a circular in March 2022 requiring existing material related party contracts to be placed before shareholders at the first general meeting after the amendment took effect. This gave already listed companies a clear and structured way to bring themselves in line with the new standard. The same kind of thoughtful bridge-building can be just as valuable for companies making the journey toward listing, extending to related party readiness, the same structured approach that Schedule VI Part A currently offers only for board governance requirements.

What Early Readiness Achieves

Early readiness of this kind achieves something concrete on both sides of the transaction. For a company, the value lies entirely in timing. A related party transaction carried out without following the procedure required under Regulation 23 is non-compliant from that moment, regardless of when the failure is actually noticed. A company that has not mapped its counterparties in advance has no way of knowing, at the point a routine renewal or amendment is being carried out, that Regulation 23 has quietly attached to it, which means the breach can occur without anyone in the company realising it at the time. Discovering this belatedly leaves little room to correct course, since Regulation 23 offers limited ratification flexibility and only in circumstances it specifically permits; for a material related party transaction entered into without the required approval, the more likely consequence is an approval gap, disclosure pressure, audit scrutiny, and regulatory questions, arriving precisely when a newly listed company can least afford this kind of governance slippage. Reaching this readiness before listing, when the company has more time and less market scrutiny, is simply a more efficient way of arriving at a position it would otherwise have to reach under pressure, in the middle of its first year as a listed company.

For investors, what this early readiness achieves is a related party picture that is actually complete for the risk it is meant to address. The related party disclosure in the offer document is one of the central pieces of information on which an investor’s decision to subscribe is based, precisely because related party transactions carry the risk of value being diverted away from minority shareholders. A material counterparty may fall outside this picture only because the accounting standard test does not extend to it, while the same counterparty would fall squarely within Regulation 23’s wider test the day the company lists; the investor’s assessment, at the time of investing, is therefore based on the standard presently applicable to the offer document, rather than the wider standard that will govern the company from the day it lists. This is where the readiness exercise proposed earlier can do more than internal work alone. Since the exercise itself creates no new disclosure obligation, a company is free to decide how, if at all, to carry its outcome forward. One simple way to do this is disclosing in the offer document, as understood at that stage, the additional individuals or entities expected to qualify as related parties under Regulation 2(1)(zb) of the LODR Regulations upon listing. This alone would let investors see the fuller picture as well, even where the underlying position may shift somewhat by the time the company actually lists. Even where a company chooses not to disclose it, the exercise still ensures the company arrives at listing with this picture already in hand, instead of assembling it for the first time only once the company is already listed.

A Practical Step Companies Can Take

The question this piece has been building toward is what a company can actually do to ensure it is ready, when it comes to related party transactions, before it faces the public market and the scrutiny that comes with it. The answer does not require SEBI to act first, and it does not require anything elaborate. It requires the company to treat the mapping exercise discussed earlier as more than an internal awareness step, and to actually use it.

The mapping itself is straightforward. During the same due diligence process in which related parties are identified based on the accounting standards (Ind AS-24/AS-18), companies can separately test whether any individuals or entities who would qualify as related parties under Regulation 2(1)(zb), whether by virtue of belonging to the promoter group regardless of shareholding, or by holding ten per cent or more of the company regardless of any other relationship, have any existing or contemplated transactions with the company. This adds no new filing, no new certification, and no new disclosure requirement. It is simply the same due diligence exercise, extended a little further.

What makes a company genuinely ready is what it does once it has this list, and there are two things worth doing with it:

1. Review existing and upcoming contracts with counterparties before listing, not after. A company that has mapped its counterparties in advance already knows which of them will qualify as related parties, so any arrangement with such a party requiring renewal, variation, amendment, or a fresh transaction can be routed through the procedure Regulation 23 prescribes as a matter of course, rather than the company discovering this only once the transaction is already underway. That is what preparedness actually looks like, knowing in advance exactly which arrangements will need to pass through Regulation 23 the next time they come up for renewal.

2. Decide, on its own terms, whether to disclose this list in the offer document. Nothing in the ICDR Regulations requires this, and a company that keeps it internal has done nothing deficient. But a company may choose to disclose this list, as understood as of the date of disclosure, in the offer document even without a legal obligation to do so, as a way of demonstrating its governance practice and earning the confidence of public investors before its shares ever trade.

This is precisely what listing-readiness means beyond the letter of the ICDR Regulations. A company applying the same discipline it already applies to board composition is simply choosing to arrive at the listing bell already prepared for the standard it is about to be held to, rather than discovering that standard for the first time once its shares are already trading.

Closing the Distance Between the Two Regulations

The comparison this piece has drawn is not between two unrelated ideas, but between two clauses sitting within the same regulatory architecture, one of which asks a company to arrive at listing already built for LODR’s standard, and one of which does not. That difference is not one SEBI necessarily intended to create, and it is not one a company needs to wait for SEBI to correct.

There is also a broader case for SEBI to consider closing this itself, and it rests on a fairly simple proposition: a regulation governing a company on its way to being listed should not, in substance, be softer than the regulation that will govern the same company the moment it lists. Schedule VI Part A already reflects this proposition for board governance. Related party readiness is the one area where that proposition is not yet applied, and a company can, at present, walk into its listed life with materially less scrutiny of its related party exposure than it will face the very next day. An amendment bringing parity between the ICDR and LODR regimes, even something as modest as a standardised disclosure of counterparties expected to qualify under Regulation 2(1)(zb) of the LODR Regulations, may be enough to bring related party governance in line with the same principle SEBI has already applied to board governance.

Until that happens, the choice simply sits with the company. A company that tests its related party exposure before listing, acts on what it finds, and discloses it if it wishes, is not doing something the law asks of it. It is practising good governance, and that is the standard on which a company’s readiness for the public markets should ultimately be judged.

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