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Corporate governance is a cornerstone of investor confidence in public companies, and Related Party Transactions (RPTs) are a key area of focus for regulators. These transactions involve the exchange of resources, services, or obligations between related entities or individuals connected to the company. While some RPTs are legitimate and beneficial, others may be used to divert resources unfairly, impacting minority shareholders. This article explains what related party transactions are, how they are regulated in India, and why they matter to investors.
A Related Party Transaction is a business deal or arrangement between two parties who are joined by a pre-existing relationship, often involving control, influence, or familial ties.
These parties could include:
Directors or Key Managerial Personnel (KMPs)
Subsidiary and holding companies
Joint ventures or associates
Close family members of senior executives
Entities controlled by these individuals
Under the Companies Act, 2013 and SEBI (LODR) Regulations, the following are classified as related parties:
Director or their relatives
Key Managerial Personnel or their relatives
Holding, subsidiary, or associate companies
Firms in which the directors or managers are partners
Companies with common directors or promoters
Any person or entity with significant influence over the company
Many corporate governance scandals in India and globally have involved RPTs:
IL&FS: Controversial transactions between group entities without proper disclosure
Satyam: Inflated earnings and fraudulent RPTs to related real estate companies
RPTs can take many forms, including:
A company may buy raw materials or services from a subsidiary or promoter-led entity.
Leasing office space or equipment from a promoter’s privately held firm.
Granting or accepting loans from a related company or individual.
Transfer or acquisition of property, intellectual property, or equipment.
Agreements involving payment for managerial or consultancy services provided by a related entity.
Although not inherently illegal, RPTs have the potential for conflicts of interest and misuse of company assets. Hence, regulatory oversight ensures:
Transparency in company operations
Fair treatment of minority shareholders
Prevention of fraud and asset stripping
Improved investor confidence
Related party transactions (RPTs) are governed by a combination of corporate and securities regulations, primarily including:
Section 188 of the Companies Act mandates:
Board approval for most RPTs
Shareholder approval for transactions exceeding prescribed thresholds
Disclosure in financial statements and board reports
Applicable to listed companies:
Audit Committee approval required for all material RPTs
Mandatory disclosure to stock exchanges
No related party can vote on resolutions where they are involved
Material RPTs defined as those exceeding 10% of annual consolidated turnover
Transparent reporting and timely disclosures are essential for regulatory compliance and investor trust. Key requirements include:
RPTs must be disclosed in the notes to accounts, showing:
Nature of the relationship
Details of the transaction
Amount involved
Outstanding balances
Material RPTs must be reported to exchanges within 30 days of shareholder approval or execution.
Listed companies must place all RPTs before the Audit Committee for review and approval.
If not properly monitored, related party transactions can lead to significant financial and governance risks, such as:
Promoters may siphon off funds or assets under the guise of business transactions.
Non-arm’s length transactions can result in unfair pricing, harming the company’s financial health.
Public exposure of controversial RPTs can damage investor trust and market valuation.
Investors can find RPT disclosures in:
Annual Reports (Notes to Accounts and Board Reports)
Corporate announcements on stock exchange websites
SEBI-mandated filings (Regulation 23 of LODR)
Staying informed about a company’s RPT practices can offer early warnings about governance lapses.
Related party transactions are an essential yet sensitive aspect of corporate governance. While many are legitimate, others can be used to mask poor practices. With evolving regulations and increased scrutiny, both companies and investors must understand how these transactions work and what they signal. Staying alert to RPT disclosures can empower investors to make more informed decisions.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Company’s director, their relatives, or entities they control, such as subsidiaries or associate companies.
Check if the deal involves parties with control, influence, or close relationships with the company.
Yes, material RPTs must be disclosed as per Companies Act and SEBI regulations.
It can be, such as property, asset, or intellectual property transfers between related parties.
The Audit Committee, Board of Directors, and sometimes shareholders, depending on the transaction size.
Review annual reports, stock exchange filings, and notes to accounts in financial statements.
Deals between completely independent parties with no control, influence, or familial connection.
No. Many RPTs are legal and even necessary. However, they must follow regulatory norms and be disclosed transparently.
Check the annual report (notes to accounts), board reports, and disclosures on stock exchange filings.
Not if they are interested parties. SEBI rules prohibit related parties from voting on resolutions in which they have a direct or indirect interest.
Any transaction exceeding 10% of the company’s consolidated annual turnover is considered material under SEBI guidelines
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