Related Party Transactions: Compliance Guide

Related Party Transactions – Compliance: The Complete Guide

Key Insight: Related Party Transactions (RPTs) are one of the most scrutinized areas of corporate governance. When not disclosed and approved properly, they can lead to severe penalties, regulatory action, and reputational damage. This guide covers everything you need to know.

In the world of corporate governance and compliance, few topics generate as much regulatory attention as Related Party Transactions (RPTs). From a startup raising its first round to a listed conglomerate executing a multi-crore deal, every company must navigate the intricate web of rules governing transactions with related parties.

This comprehensive guide covers the definition of related party transactions, who qualifies as a related party, the legal framework in India and globally, the approval and disclosure process, exemptions, penalties for non-compliance, and best practices for building a robust RPT compliance framework.

What Are Related Party Transactions (RPTs)?

A Related Party Transaction is any business deal or arrangement between a company and a person or entity that is connected to the company through ownership, management, family relationships, or other means of control or significant influence.

In simpler terms — when a company buys goods from a supplier owned by its own director, or lends money to a subsidiary, or pays rent to a property owned by a promoter’s family member — these are all related party transactions.

RPTs are not inherently illegal or improper. In fact, many intra-group transactions are commercially necessary and efficient. However, because they carry the risk of conflict of interest and tunnelling (diverting company resources for personal benefit), they are subject to stringent disclosure, approval, and reporting requirements.

Who Is a Related Party? — Legal Definition

Under Section 2(76) of the Companies Act, 2013, a ‘related party’ with reference to a company means:

A director or key managerial personnel (KMP) of the company or their relative.
A firm in which a director, manager, or their relative is a partner.
A private company in which a director or manager or their relative is a member or director.
A public company in which a director or manager is a director and holds, along with their relatives, more than 2% of the paid-up share capital.
Any body corporate whose Board of Directors, managing director, or manager is accustomed to act on the advice of a director, manager, or their relatives.
Any person on whose advice, directions, or instructions a director or manager of the company is accustomed to act.
Any company that is a holding, subsidiary, or an associate company of such company, or a subsidiary of a holding company to which it is also a subsidiary.
Such other persons as may be prescribed under the Rules.

Who Is a ‘Relative’ Under the Companies Act?

The term ‘relative’ is defined under Section 2(77) of the Companies Act 2013 and includes:

Members of a Hindu Undivided Family (HUF)
Husband and wife
Father (including step-father)
Mother (including step-mother)
Son (including step-son)
Son’s wife
Daughter
Daughter’s husband
Brother (including step-brother)
Sister (including step-sister)

What Qualifies as a Related Party Transaction?

Under Section 188 of the Companies Act 2013, the following transactions between a company and its related parties require compliance:

Transaction Type	Description
Sale, purchase or supply of goods or materials	Including raw materials, finished goods, and consumables
Selling or otherwise disposing of, or buying, property of any kind	Immovable, movable, tangible, or intangible assets
Leasing of property of any kind	Including land, buildings, vehicles, and intellectual property
Availing or rendering of any services	Including management services, IT services, HR services
Appointment of any agent for purchase/sale of goods, materials, services or property	Including distribution or marketing agreements
Related party’s appointment to any office or place of profit	Including remuneration-bearing positions in the company or subsidiaries
Underwriting the subscription of any securities or derivatives thereof	Including IPO underwriting by related entities

Legal Framework Governing RPTs in India

1. Companies Act, 2013

The primary legislation governing RPTs in India is the Companies Act, 2013. The key sections are:

Section 188: Requires prior approval from the Board and shareholders (by ordinary resolution or special resolution, depending on the transaction value) for related party transactions.
Section 184: Requires every director who is concerned or interested in a contract with the company to disclose their interest at a Board meeting.
Section 2(76): Defines ‘related party.’
Section 2(77): Defines ‘relative.’
Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014: Prescribes thresholds for shareholder approval.

2. SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015

For listed companies, SEBI’s LODR Regulations impose additional, stricter requirements:

Regulation 23: Mandates that all material RPTs require prior approval from shareholders through a resolution. The promoters and related parties cannot vote on such resolutions.
Material RPT Definition (post-2022 amendment): Any transaction exceeding Rs. 1,000 crore or 10% of the annual consolidated turnover of the company, whichever is lower.
Audit Committee Approval: All RPTs must be pre-approved by the Audit Committee, which must include a majority of independent directors.
Omnibus Approval: The Audit Committee may grant omnibus approval for repetitive transactions, subject to value and time limits.
Half-Yearly Disclosure: Listed companies must disclose all RPTs on a half-yearly basis to stock exchanges.
Annual Report Disclosure: RPTs must be disclosed in the Annual Report in Form AOC-2.

3. Indian Accounting Standards (Ind AS 24)

From a financial reporting perspective, Ind AS 24 (Related Party Disclosures) requires companies to disclose:

The nature of the related party relationship.
The amount of transactions during the period.
The amount of outstanding balances, including commitments.
Provisions for doubtful debts related to the outstanding balances.
Any expense recognized during the period regarding bad debts from related parties.

4. Income Tax Act, 1961 — Transfer Pricing

RPTs that involve cross-border transactions between associated enterprises are also subject to Transfer Pricing regulations under Sections 92 to 92F of the Income Tax Act, 1961. The arm’s length principle requires that such transactions be priced as if they were between unrelated parties.

Form 3CEB: A Chartered Accountant’s report certifying that international RPTs are at arm’s length.
Transfer Pricing Officer (TPO): May conduct an assessment of whether the transfer price adopted is appropriate.
Advance Pricing Agreement (APA): Allows companies to agree on transfer pricing methodology in advance with the tax authority.

Board Approval Process for RPTs

Every company must follow a structured approval process before entering into a related party transaction:

Identify the Transaction: Determine whether the proposed transaction involves a related party as defined under the Act.
Director Disclosure: The interested director must disclose their interest at the Board meeting under Section 184.
Audit Committee Review (for listed companies): The Audit Committee must review and approve the transaction. The committee must be satisfied that the terms are fair and at arm’s length.
Board Approval: The Board must pass a resolution approving the RPT. The interested director cannot participate in the discussion or vote.
Shareholder Approval (if required): For transactions exceeding prescribed thresholds, prior approval of shareholders must be obtained through an ordinary or special resolution.
Documentation: Maintain proper contracts, minutes, and records of all RPT approvals.
Disclosure: Make all required disclosures in the Board’s Report, Annual Report (Form AOC-2), and to stock exchanges (for listed companies).

Threshold Limits for Shareholder Approval

Under the Companies (Meetings of Board and its Powers) Rules, 2014, the following thresholds trigger mandatory shareholder approval (ordinary resolution):

Nature of Transaction	Threshold (Paid-up Capital)	Threshold (Net Worth/Turnover)
Sale/purchase/supply of goods or materials	Not prescribed	10% of turnover or Rs. 100 Cr (whichever is lower)
Selling/buying property	Not prescribed	10% of net worth or Rs. 100 Cr
Leasing of property	Not prescribed	10% of net worth or Rs. 100 Cr
Availing or rendering services	Not prescribed	10% of turnover or Rs. 50 Cr
Appointment to office or place of profit	Not prescribed	Rs. 2.5 Lakh per month
Underwriting of securities	Not prescribed	1% of net worth

Important Note: For listed companies, SEBI’s LODR requires shareholder approval for ALL material RPTs (exceeding Rs. 1,000 crore or 10% of consolidated turnover, whichever is lower). Promoters and related parties are prohibited from voting on such resolutions.

Exemptions from RPT Compliance Requirements

Not all related party transactions require the full approval process. The following are exempt:

Transactions entered into between two government companies.
Transactions entered into by a company in its ordinary course of business and at arm’s length pricing.
Transactions between a holding company and its wholly owned subsidiary, where the subsidiary’s financial statements are consolidated with the holding company and placed before shareholders for approval.
Transactions involving payment of remuneration to directors or KMPs authorized by the Board and shareholders.
Transactions in the ordinary course of business for banking companies.

What Does ‘Arm’s Length’ Mean?

‘Arm’s length transaction’ means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest. The price, terms, and conditions should reflect what would prevail in an open market transaction between two independent parties.

Disclosure Requirements — A Detailed Overview

For All Companies — Board’s Report (Form AOC-2)

Every company that enters into RPTs which are not at arm’s length or are material must disclose details in Form AOC-2, which is annexed to the Board’s Report. This includes:

Details of contracts or arrangements not at arm’s length.
Justification for entering into non-arm’s length transactions.
Date of Board/shareholder approval.
Amount paid as advance, if any.

For Listed Companies — Additional Disclosures

Disclosure to Stock Exchanges: Within 24 hours of the Board meeting approving material RPTs.
Half-Yearly Disclosure: On a consolidated basis, within 15 days from the date of publication of half-yearly results.
Annual Report: Detailed disclosure in the Annual Report and Directors’ Report.
Related Party Transaction Policy: Must be published on the company’s website.
Audit Committee Charter: Must include RPT review and approval as a specific responsibility.

The Role of the Audit Committee in RPT Compliance

The Audit Committee plays a central and independent role in RPT governance:

Pre-approval of all RPTs, whether individual or on an omnibus basis.
Review of RPTs on a quarterly basis to ensure compliance with approval conditions.
Assessment of whether the transaction is in the ordinary course of business and at arm’s length.
Withdrawal of omnibus approval if the transaction does not fall within the originally approved scope.
Recommending to the Board on the RPT policy and any amendments thereto.

Omnibus Approval — When and How

For repetitive or routine RPTs, the Audit Committee may grant omnibus (blanket) approval, subject to:

The transactions must be repetitive in nature.
The approval must specify the maximum value of transactions in a financial year.
The approval is valid for one financial year only.
The Audit Committee must review details of transactions at least on a quarterly basis.

Penalties and Consequences of Non-Compliance

Warning: Non-compliance with RPT provisions can result in penalties on the company and its directors, voidance of contracts, and disqualification of directors.

Under Companies Act 2013 — Section 188(4)

Where a contract or arrangement is entered into in contravention of Section 188:

In the case of a listed company: A fine of not less than Rs. 25 lakhs extending to Rs. 5 crores, OR imprisonment of up to 1 year, OR both.
In the case of an unlisted company: A fine of not less than Rs. 25,000 extending to Rs. 5 lakhs.
The contract or arrangement is voidable at the option of the Board.
Directors who are party to the contract and who failed to disclose their interest are personally liable.

Under SEBI LODR — For Listed Companies

SEBI can impose monetary penalties under Section 15HB of the SEBI Act.
SEBI can issue directions including orders to rectify disclosures.
In serious cases, trading in the company’s securities may be suspended.
Promoters and directors may face debarment from accessing capital markets.

Global Framework: RPTs Under IFRS and International Regulations

IAS 24 — Related Party Disclosures (IFRS)

Under International Accounting Standards (IAS 24), companies are required to disclose:

Parent-subsidiary relationships, regardless of whether there have been transactions.
Key management personnel compensation in aggregate and by category.
The nature and amounts of all material RPTs.
Outstanding balances and their terms and conditions.

United States — SEC Rules and Sarbanes-Oxley Act (SOX)

SEC Regulation S-K (Item 404): Requires disclosure of all transactions with related persons exceeding $120,000 in the annual proxy statement.
SOX Section 402: Prohibits personal loans by public companies to their directors and executive officers.
NYSE/NASDAQ Listing Rules: Require Audit Committee pre-approval for all related party transactions.

United Kingdom — Companies Act 2006 and FRC Guidelines

Section 190-196: Requires shareholder approval for substantial property transactions with directors.
FRC UK Corporate Governance Code: Requires the Board to manage conflicts of interest, including RPTs, through proper disclosure and committee oversight.

Building a Robust RPT Compliance Framework

A proactive compliance framework is far more effective than reactive management. Here’s how companies should build one:

Step 1: Develop a Comprehensive RPT Policy

Define related parties and related party transactions clearly.
Specify the approval process (Board, Audit Committee, shareholders).
Set threshold limits for different types of approvals.
Establish the omnibus approval process and its conditions.
Define disclosure requirements — internal and external.

Step 2: Maintain a Related Party Register

Maintain an updated register of all related parties.
Require all directors and KMPs to submit annual declarations of their interests.
Update the register when new appointments are made or relationships change.

Step 3: Implement a Transaction Screening Process

Before entering into any transaction, screen it against the related party register.
Use automated systems or ERP modules to flag potential RPTs.
Require business units to certify whether a proposed transaction involves a related party.

Step 4: Standardize Approval Documentation

Maintain standardized templates for Audit Committee approval memos.
Ensure Board meeting minutes specifically record RPT approvals.
Maintain copies of all underlying contracts and agreements.

Step 5: Train Directors, KMPs, and Finance Teams

Conduct annual training on RPT compliance requirements.
Ensure new Board members and KMPs are briefed on RPT obligations at induction.
Train finance and accounts teams on the disclosure requirements under Ind AS 24.

Step 6: Regular Audit and Review

Internal audit should include RPT compliance as a standing agenda item.
Statutory auditors should review and report on RPTs in their audit report.
The Audit Committee should review the status of all RPTs quarterly.

Common Issues and How to Address Them

Common Issue	Risk	Solution
Transactions not identified as RPTs	Non-disclosure, regulatory penalty	Maintain updated related party register
Retrospective approvals	Void contracts, director liability	Implement pre-approval process
Inadequate Audit Committee oversight	Conflict of interest, governance failure	Define Audit Committee charter with RPT mandate
Incomplete Form AOC-2 disclosures	RoC action, shareholder litigation	Standardize disclosure templates
No RPT Policy on website	SEBI action for listed companies	Publish and update RPT policy annually
Transfer pricing not at arm’s length	Income tax adjustment, penalties	Conduct annual TP study and benchmarking

Recent Amendments and Regulatory Updates

SEBI LODR Amendments (January 2022)

The Securities and Exchange Board of India significantly tightened RPT regulations in its January 2022 amendment to the LODR Regulations:

Expanded the definition of related party: Any person or entity forming part of the promoter or promoter group is deemed a related party — regardless of whether they hold shares in the listed entity.
Extended RPT scope to subsidiaries: All material RPTs entered into by subsidiaries of a listed company also require shareholder approval from the listed parent entity’s shareholders.
Tighter arm’s length threshold: The definition of ‘material RPT’ was lowered to Rs. 1,000 crore or 10% of consolidated turnover (earlier it was 10% of standalone turnover).
Non-executive director on Audit Committee: Majority of the Audit Committee must be independent directors when reviewing RPTs.

Companies (Amendment) Act 2020

The 2020 amendment made several changes impacting RPT compliance:

Decriminalization: Several RPT-related violations were decriminalized — fines remain applicable but imprisonment was removed for specific contraventions.
Reduced penalties for small companies and OPCs.

Frequently Asked Questions (FAQs)

Q1. Are all RPTs harmful or problematic?

No. RPTs are a normal feature of business, especially in group companies. The concern is not the transaction itself but whether it is conducted on fair terms, properly disclosed, and appropriately approved. A well-governed RPT that benefits the company is perfectly acceptable.

Q2. Can a related party vote on resolutions approving RPTs?

Under the Companies Act, a related party who is a member of the company is not disqualified from voting. However, under SEBI’s LODR for listed companies, the related party and all promoters/promoter group entities are specifically prohibited from voting on RPT resolutions.

Q3. What is tunnelling in the context of RPTs?

Tunnelling refers to the practice of using RPTs to transfer assets or profits from a company to its controlling shareholders or related entities at the expense of minority shareholders. It is one of the primary reasons why RPT regulations exist and why disclosure and approval requirements are so stringent.

Q4. Does the RPT policy need to be approved by shareholders?

Under SEBI LODR Regulation 23(1), the RPT policy must be approved by the Board. For listed companies, it must also be disclosed on the company’s website. There is no mandatory requirement for shareholder approval of the policy itself, but the Board must ensure it reflects shareholder interests.

Q5. Are transactions between Indian holding company and wholly owned foreign subsidiary covered?

Yes. Cross-border RPTs are covered both under Companies Act Section 188 and, more importantly, under Transfer Pricing regulations. Companies must maintain proper documentation and ensure arm’s length pricing for all international related party transactions.

Checklist: RPT Compliance for Indian Companies

Maintain an updated Register of Related Parties (directors, KMPs, and their relatives).
Require all directors to submit annual declarations of interest under Section 184.
Adopt and publish a Board-approved RPT Policy (mandatory for listed companies).
Ensure all RPTs are placed before the Audit Committee for prior approval.
Obtain Board approval by resolution — interested directors must not vote.
Obtain shareholder approval where transaction values exceed prescribed thresholds.
File Form AOC-2 as an annexure to the Board’s Report.
Disclose all RPTs in the Notes to Financial Statements under Ind AS 24.
For listed companies, disclose material RPTs to stock exchanges within 24 hours.
Maintain arm’s length pricing and Transfer Pricing documentation for cross-border RPTs.
Conduct annual internal audit of RPT compliance.
Brief Audit Committee, Board, and KMPs on RPT obligations annually.

Conclusion

Related Party Transactions, when properly governed, are a routine and efficient part of business operations. However, the potential for conflict of interest makes them a high-priority area for regulators, auditors, and investors alike.

The compliance framework for RPTs in India — governed by the Companies Act 2013, SEBI LODR, Ind AS 24, and Transfer Pricing regulations — is comprehensive and constantly evolving. Companies that invest in robust RPT governance — through clear policies, strong Audit Committee oversight, timely disclosures, and well-documented approvals — not only avoid regulatory penalties but also build the trust of investors and stakeholders.

The message from regulators is clear: transparency and fairness in related party dealings are non-negotiable. Treat every RPT as if it will be scrutinized — because it will be.