Related Party Transactions: Why Mere Disclosure Is Not Enough – ROC Penalty in Adani Power Case
ROC Imposes Penalty for Failure to Maintain Register and Substantiate Arm’s Length Nature of Transactions
In corporate governance, documentation is often as important as compliance itself. A company may genuinely believe that its related party transactions are conducted in the ordinary course of business and at arm’s length. However, unless such claims are supported by proper records and evidence, regulators may not accept them at face value.
A recent adjudication by the Registrar of Companies (ROC), Gujarat, in the matter of Adani Power Limited highlights this principle. The case serves as an important reminder that disclosure in financial statements alone may not be sufficient. Companies must also maintain statutory records and supporting documentation required under the Companies Act, 2013.
The adjudication resulted in penalties being imposed on the company’s directors, including chairman Gautam Adani, for alleged non-compliance relating to related party transactions and maintenance of statutory registers.
The Background of the Case
During examination of the financial statements of Adani Power Limited for FY 2017-18, FY 2018-19 and FY 2019-20, the ROC observed disclosures relating to various related party transactions.
The disclosures indicated that the company had entered into transactions involving related parties and contracts falling within the framework of Sections 184 and 188 of the Companies Act, 2013.
However, according to the ROC, the company had not recorded the details of such transactions in the Register of Contracts and Arrangements maintained in Form MBP-4, as required under Section 189 of the Companies Act, 2013.
This omission became the focal point of the proceedings.
Understanding Sections 188 and 189
To appreciate the significance of the matter, it is useful to understand the statutory framework.
Section 188 – Related Party Transactions
Section 188 governs transactions entered into by a company with related parties.
The provision covers transactions such as:
• Sale or purchase of goods;
• Supply of services;
• Leasing arrangements;
• Appointment of agents;
• Availing or rendering services;
• Other specified transactions.
However, transactions carried out:
• In the ordinary course of business, and
• On an arm’s length basis,
are generally exempt from certain approval requirements under Section 188.
Section 189 – Register of Contracts
Section 189 requires companies to maintain a register containing particulars of contracts and arrangements in which directors are interested.
The prescribed register is maintained in Form MBP-4.
The purpose of the provision is to ensure transparency and facilitate regulatory oversight regarding related party dealings.
The Company’s Defence
Representatives appearing on behalf of the company and its directors argued that the transactions disclosed in the financial statements were:
• Conducted in the ordinary course of business; and
• Undertaken on an arm’s length basis.
According to the company, such transactions were therefore outside the scope of Section 188 requiring further compliance.
The company also contended that:
• No penalty should be imposed;
• The company itself was not liable under Section 189(6);
• The Company Secretary should not be treated as an officer in default.
The defence essentially rested on the proposition that the transactions were commercially ordinary and conducted at market terms.
Why the ROC Rejected the Explanation
The ROC was not persuaded by the submissions.
The key reason was not necessarily the existence of the transactions themselves but the absence of supporting evidence substantiating the company’s claim.
According to the adjudication order, the company failed to furnish adequate documentary evidence demonstrating that the transactions were:
• Conducted at arm’s length; and
• Undertaken in the ordinary course of business.
As a result, the ROC declined to accept the explanation and proceeded with adjudication.
The order underscores an important compliance principle:
A claim of arm’s length pricing must be supported by evidence. Mere assertion may not suffice.
The Importance of Form MBP-4
The case also highlights a frequently overlooked compliance requirement.
Many companies focus extensively on obtaining approvals and making disclosures in financial statements but pay comparatively less attention to maintaining statutory registers.
Form MBP-4 is not merely a procedural formality.
It serves as a contemporaneous record of contracts and arrangements involving interested directors and related parties.
Failure to maintain or update the register can expose directors and key managerial personnel to penal consequences, even where the transactions themselves may be commercially legitimate.
Penalty Imposed
After considering the matter, the ROC Gujarat imposed penalties on the concerned directors.
The order reportedly imposed:
• Penalty of ₹75,000 on Gautam Adani;
• Penalty of ₹75,000 each on the Managing Director and Whole-Time Director.
The case therefore demonstrates that liability under corporate law compliance provisions may extend to individual officers responsible for governance and statutory compliance.
Key Lessons for Companies
The adjudication provides several practical lessons for companies and corporate professionals.
1. Disclosure Alone Is Not Enough
Disclosure of related party transactions in financial statements does not automatically establish compliance with Sections 188 and 189.
2. Maintain Supporting Documentation
If transactions are claimed to be at arm’s length and in the ordinary course of business, companies should maintain contemporaneous evidence supporting such claims.
Examples may include:
• Pricing studies;
• Comparable market quotations;
• Board notes;
• Commercial justification records;
• Independent valuation reports where appropriate.
3. Maintain Statutory Registers
Registers prescribed under the Companies Act should be updated regularly and reviewed periodically.
4. Directors Can Face Personal Liability
Corporate compliance failures can result in penalties not only on the company but also on directors and officers responsible for governance.
5. Documentation Is the Best Defence
In regulatory proceedings, undocumented compliance is often treated as non-compliance.
Broader Governance Implications
The case reflects a broader regulatory trend.
Authorities are increasingly focusing not merely on the substance of transactions but also on the governance processes surrounding them.
Corporate compliance today requires companies to demonstrate:
• What was done;
• Why it was done;
• Whether approvals were obtained;
• Whether records were maintained;
• Whether statutory requirements were followed.
The ability to produce documentary evidence often determines the outcome of regulatory scrutiny.
Conclusion
The ROC Gujarat’s adjudication in the matter of Adani Power Limited serves as a powerful reminder that compliance is not complete merely because a transaction is disclosed or believed to be commercially justified.
Where companies rely on exemptions available for transactions undertaken in the ordinary course of business and at arm’s length, they must be prepared to substantiate such claims with proper evidence. Equally important is compliance with statutory record-keeping requirements such as maintenance of Form MBP-4 under Section 189.
The case reinforces a simple but critical governance principle: what is not documented may be difficult to defend.
For companies, directors, company secretaries and compliance professionals, the message is clear-maintaining proper records is not a procedural burden; it is a vital component of corporate compliance and risk management.
The copy of the order is as under:
