Related Party Transactions
Related Party Transactions (RPTs) are business dealings between a company and parties that have a pre-existing relationship with it — such as promoters, subsidiaries, directors, or key managerial personnel — which must be disclosed and, in certain cases, approved by independent shareholders.
Related parties include promoters and their associates, subsidiary and holding companies, joint ventures, associates, key managerial personnel (KMP), and entities in which directors have significant influence. Transactions with these parties — loans, sales, purchases, rent, management fees, guarantees — must be disclosed in the annual report under Ind AS 24 (Related Party Disclosures) and approved through the prescribed governance mechanisms under SEBI's LODR regulations.
For listed Indian companies, material RPTs require prior approval of the audit committee and, in many cases, shareholder approval by an ordinary resolution where only non-interested shareholders can vote. This regulatory framework was strengthened significantly by SEBI in 2021, which expanded the definition of related parties, lowered the thresholds for shareholder approval, and required RPT disclosures on a half-yearly basis. The intent was to curb tunneling — the diversion of corporate resources from listed entities to promoter-controlled private entities.
The Indian corporate landscape has seen several instances where RPTs were used to extract value from minority shareholders. Companies extended large unsecured loans to promoter entities at below-market interest rates, paid inflated management fees to promoter group companies, or transferred assets to private entities at below-market prices. Scrutinising the RPT disclosure section in annual reports — paying attention to the nature, quantum, and pricing of transactions — is one of the most important governance checks for Indian investors.
Not all RPTs are problematic. Legitimate business dealings within a group structure — such as an FMCG company purchasing packaging from a promoter-owned supplier at competitive market rates, or a bank lending to a subsidiary on standard commercial terms — can be efficient and economically sensible. The test is whether the terms of the transaction are at arm's length (comparable to what an unrelated third party would offer) and whether the disclosure is transparent and complete.
For retail investors, reading the RPT section should focus on: the total quantum of RPTs relative to company revenues or net worth, the nature of transactions (loans and guarantees deserve more scrutiny than routine purchases), trends over time (growing RPT volumes without clear business rationale are concerning), and whether the audit committee has provided an unqualified opinion on the fairness of these transactions. When RPTs are large, complex, and poorly explained, they are a significant governance risk factor.