India’s M&A market is flourishing well. Regulations are getting revised to pace with the changing scenario. Audit committees are filing their approvals as per the requirements. Boards are signing disclosures with practiced efficiency. And yet, somehow, inexplicably, promoters are still walking away with minority shareholders’ money. Legally. Quietly. With every procedural requirement ticked.
That is the contradiction nobody talks about loudly enough.
Related Party Transactions (RPTs) in Indian mergers and acquisitions lie at the intersection of law as written and law as practiced. The gap between these two is not merely a regulatory inconvenience, but also a structural inefficiency that impacts shareholder value, year after year, deal after deal.
Bertrand, Mehta, and Mullainathan, the economists who gave these phenomena the name of Tunneling, described it as the systematic transfer of corporate resources from a listed entity to its controlling shareholders, via transactions that appear perfectly routine. For example, an inter-corporate loan routed to a private holding company, preferential share allotments which are issued to affiliates at a steep discount, and a land bank transferred at half of its market value to a promoter’s private entity. While these transactions may appear defensible when viewed individually, their cumulative effect can be detrimental.
India is particularly susceptible to this phenomenon. Promoters in NSE-listed companies held an average stake of approximately 51.1% as of June 2026. It is concerning to think what this concentration means in practice: the person approving a transaction and the person benefiting from it are often one and the same.
The 2022 IICA study of 500 listed firms found that 32% of RPTs in M&A deviated by more than 20% from arm’s-length benchmarks, producing between 16 – 22% excess value erosion for minority shareholders. Empirical regressions on NSE panel data from 2015 – 2024 go further, linking RPT intensity to a 3.7% accretion in promoter stakes, with zero corresponding improvement in company performance.
The data is telling us something the compliance filings are not. And it is past time to listen.
Tunneling does not occur through a single mechanism but through a series of methods, each calibrated to exploit a different loophole in India’s regulatory architecture.
Upstream tunneling: Under this mechanism, assets of a listed company, land, inventory, infrastructure, are sold or leased to a promoter-controlled entity at prices significantly below market value. As in real estate M&A, land banks have been routinely transferred at 30-50% of their actual worth during schemes of arrangement. Herein, the listed company absorbs this accounting loss, and the promoter’s private vehicle captures the arbitrage. Clean, quiet, completely “above board.”
Downstream tunneling: In this type of tunneling, promoters issue preferential allotments to affiliates at discounted prices, diluting the public shares without even triggering the mandatory open offer mechanism under the SEBI Takeover Code. NSE data from the period of 2022-2024 records around 15% of stake shifts in the listed companies happening by exactly these RPT structured allotments. A prominent example would be the DLF Universal case of 2010. In this instance 234 million shares were allotted to promoter affiliates at Rs 4 per share, at a discount of 40%, while minority holdings were slashed from 25% to a mere 12%. Henceforth, SEBI imposed a Rs 400 crore penalty but notably upheld the transaction. What does this communicate to the market? Essentially it led to the inference that tunneling costs money, while the deal remains untouched.
Freeze-out tunneling: This is the most sophisticated of the three forms of tunneling. Under this mechanism, RPT-financed buybacks or structured delisting are deployed to squeeze out minority shareholders while the acquirer sidelines the open-offer obligation entirely. The example of Future Retail is notable here. In this case a Rs 24,713 crore asset sale to Reliance Retail, held during the Amazon-Walmart dispute, which included Rs 3,500 crore in warehouse transfers to promoter-linked entities at depreciated book values. In this case, every procedural requirement was fulfilled as Audit Committee approval was taken, a 94% disinterested shareholder vote recorded, BSE filings was duly made, NCLT sanction was obtained. Still, minorities lost approximately 70% of their investment in the subsequent delisting. SEBI’s fine? Just Rs 90 crore levied in the context of the value transferred, which was notably a rounding error.
Section 188 of the Companies Act, 2013 lists ten categories of RPTs which require board approval and, for the material transactions which exceed 10% of the aggregate turnover or assets, then require a shareholder vote by the disinterested members.
Section 177 mandates an Audit Committee, comprising at least two-thirds independent directors, requiring them to pre-approve RPTs and look at the arm’s-length rationale.
Section 184 mandates that directors need to disclose their interest and recuse themselves from the relevant votes.
Notably, the SEBI LODR Regulations, 2015 add another layer for the listed companies. Regulation 23(1) requires prior approval from unrelated shareholders for material RPTs; Regulation 23(4) provides for an arm’s length test; Regulation 23(9) mandates half-yearly public disclosures.
These provisions indicate that India possesses a robust statutory framework for dealing with the RPTs. The real issue is what happens in practice and what is ignored during notable deals.
SEBI enacted the Fifth Amendment to the LODR Regulations which is effective from December 18, 2025. This amendment inserted Schedule XII and replaced the flat Rs 1,000 crore materiality threshold with a graduated, turnover linked structure. The logic initially looks reasonable as a mid-cap firm and a Rs 1,50,000 core conglomerate should not face identical numerical triggers. Under this new framework, companies whose turnover exceeds Rs 40,000 crore face a threshold which is capped at Rs 5,000 crore, while smaller entities retain a 10% of turnover standard. Further, SEBI introduced a supplementary SEBI circular on October 13,2025 which introduced simplified disclosure norms for the “moderate value” RPTs, for those which are falling below 1% of annual consolidated turnover or Rs 10 crore.
The real problem lies here. By linking materiality exclusively to turnover, rather than net tangible assets or net worth, this framework creates a blind spot with serious implications. For example, imagine a conglomerate with Rs 1,50,000 crore in turnover which transfers a core strategic asset worth Rs 4,000 crores to a promoter entity. As per schedule XII, no shareholder vote would be required since the transaction falls below the Rs 5,000 crore cap. Still this same Rs 4,000 crores could represent the 15-20% of the company’s total equity.
Notably, high-turnover, low-margin sectors such as petroleum, retail, energy, are mostly exposed to this vulnerability.
The simplified disclosure framework presents another concern. Since it introduces an aggregation risk that nobody seems to discussing much. As multiple threshold transactions, done in a sequence, can tunnel substantial sums without even require to trigger the detailed disclosure requirements that apply to material RPTs. Compliance is stringent but it becomes devoid of any substance.
On 20th February, 2026 , SEBI issued a show-cause notice to Zee Entertainment Enterprises Ltd., its Chairman Emeritus Subhash Chandra, CEO Punit Goenka, and 84 other individuals and entities. The key allegation in this case concerned a 2018 “Letter of Comfort” issued by Yes Bank, off the balance sheet, without board approval , which allowed the bank to apply Zee’s Rs 200 crore fixed deposits to settle debts that were owned by seven associate entities which was controlled by the promoter family.
When Zee claimed that the funds have been repaid in 2019, SEBI’s investigation led to the discovery of something remarkable: that the “repayment” had originated from ZEE itself, or from other listed Essel group companies, which was passed through multiple intermediary layers to give the illusion of a legitimate and genuine recovery, essentially what is commonly described as a textbook layering scheme.
This led to severe consequences as the $ 10 billion Zee-Sony merger, which was one of the most anticipated media consolidations in South Asian corporate history, was abandoned in January 2024, substantially derailed by the “promoter overhang” that SEBI’s investigation had created. As of February 2026, Zee’s market capitalization remains approximately 35% below its pre-merger level. From this, it can be easily noticed that tens of thousands of crores in minority wealth have been lost.
The 2018 Fortis Healthcare case is a demonstration of a different and more devastating failure. Herein, Promoters routed Rs 397 crore from the listed entity to their private holding company via a series of inter-corporate loans. And the auditors refused to sign off on the accounts. Although SEBI initiated an investigation, the demand notices to entities involved herein were issued in mid-2023, which was essentially five years after the capital had already left the building.
By the time legal proceedings were completed, the time-value of recovery for any minority shareholder had already ceased to exist by that time. This is the enforcement lag problem that has happened here: As the law existed, the remedy also existed, and neither arrived in time to matter.
Singapore ranks first globally on RPT governance. India ranks 63rd on the World Bank’s minority protection index. This gap is not primary due to any legal lacunae, but design philosophy and the enforcement gap.
The most important structural distinction is the metric of materiality. Singapore’s SGX Listing Rules under Chapter 9 use Net Tangible Assets as the reference point. Rule 905 mandates an immediate announcement for Interested Person Transactions exceeding 3% of group NTA; Rule 906 requires for shareholder approval above 5%. This directly protects the balance sheet, the actual locus of equity value, rather than the revenue line. A transaction draining 5% of NTA is a direct related to shareholder equity; under India’s turnover-based framework, looking like an identical transaction may never reach the applicable threshold.
The second key differentiator is statutory voidability. As per Section 25C of the Singapore Companies Act, any transaction if entered in breach of applicable limits is voidable at the company’s option, and the responsible director must necessarily return their gains as well as indemnify the company of any losses if happened, irrespective of whether criminal fraud is established. In Indian scenario, a minority shareholder has to necessarily prove fraud or mismanagement as per Section 241 of the Companies Act, 2013, setting a high evidentiary bar. This added with the requirement of 24-month average NCLT disposal timelines and the prohibition on contingency fees; private enforcement becomes economically irrational for most of the aggrieved shareholders.
SGX Reg Co conducted 127 proactive compliance interventions in 2023 alone, achieving a 92% resolution rate. India has no comparable standing unit. SEBI’s enforcement remains overwhelmingly reactive and forensic, typically commencing years after the capital has left the entity. Singapore’s tunneling incidence is approximately 1.1% of GDP on the Djankov Index; India’s is 4.2%. Indian family-controlled firms trade at a minority discount of 20 – 25% below NAV. Singapore’s comparable figures are around 8%. These different numbers are evident of the different enforcement realities.
Adjusting the materiality thresholds are just calibration. For real reforms structural changes which later incentives, not just procedural triggers are appreciated.
Some suggestions are as follows:
India’s RPT framework is not lacking in legal robustness. As the Companies Act, 2013 read with the LODR Regulations provide a comprehensive procedure of disclosure, board oversight, and shareholder interest. What is lacking are meaningful consequences, for deals which are structured to comply without being not fair, for the audit committee which approved 98% of RPTs without modification, and for the fines that are lower than the gains derived.
The 2025 amendments are commercially sensible, but cannot be categorized as governance reform. Until India’s regulators move from reactive, fine-centric enforcement to proactive, asset-protecting surveillance. And until minority shareholders possess a practically accessible legal remedy, the gap between procedural compliance and substantive fairness will be the key concern of the M&A ecosystem in Indian context. The Zee Entertainment case, still being addressed in June 2026, offers both a warning and an opportunity. This is a significant opportunity to demonstrate that India’s regulatory machinery can produce substantive outcomes, and not merely procedural records.
The question is whether anyone in a position to act is paying close enough attention.