At its core, a Related Party Transaction (RPT) is any exchange of resources, services or obligations between a company and another party with whom it shares a pre-existing relationship, i.e. a related party.
From a legal and regulatory perspective, RPTs are relevant under the Companies Act 2013 in India which defines RPTs as contracts or arrangements covered under Section 188 or transactions regulated by Ind AS 24 for accounting standards. SEBI regulations highlight RPTs that include transfers that indirectly benefit related parties – even through intermediaries. The scope of RPTs covers a wide network of dealings, including:
- Transactions between a listed entity and its related party
- Transactions between a listed entity and the related party of its subsidiary
- Transactions between a subsidiary and a related party of the listed entity
- Transactions where a listed entity or any of its subsidiaries engages with a third party, but the ultimate benefit flows to a related party of the listed entity or its subsidiary
Simply put, these are dealings within the company’s “inner circle”. Transparency and accountability are essential to maintain trust and compliance with regulatory reporting of RPTs.
Who Qualifies as a “Related Party”?
The definition of a related party spans multiple frameworks – Companies Act, Ind AS 24, SEBI LODR. Common threads include:
- A director, key managerial personnel (KMP), or their relatives
- A firm or company in which a director or their relatives are partners, members or hold significant control
- Holding, subsidiary, or associated companies
- Any individual or entity forming part of the promoter or promoter group
- Entities holding significant equity – 10% or more from April 1, 2023, on a direct or beneficial basis – in a listed company
The regulatory frameworks are aimed at capturing every possible connection that could sway the business decisions. Managing such a diverse set of relationships calls for a centralized related party database, a SEBI RPT compliance solution that makes it easier for companies to track connections and identify potential conflicts of interest.
Defining the Transactions that Qualify as RPTs
A wide range of transactions fall under RPTs, including but not limited to:
- Sale or purchase or supply of goods or materials,
- Selling or buying or leasing property,
- Availing or rendering of services,
- Appointing agents for goods, services, or property transactions,
- Licensing, R&D transfers, financing, guarantee, management contracts, deputation of staff
This is an inclusive but not exhaustive list.
Why Related Party Transactions Matter?
RPTs may seem straightforward- but they raise fundamental governance questions. When insiders or closely tied entities transact, conflicts of interest can affect judgement, compromise transparency, and skew decision-, putting minority stakeholders, market integrity and even financial accuracy at risk. A Related Party Management System that auto-integrate a listing of relationships, automated reviews and approvals, flag potential risks and maintain a full audit ready trail at a point-in-time is a god-send.
Pitfalls of Engaging in Non-Compliant RPTs – A Quick Look
Following are some of the risks associated with the RPTs :
- Conflicts of interest– Decisions can be undertaken with the intention of favoring a related party, not the broader stakeholder base.
- Non-Arm’s-Length Deals– Assets could be misvalued if the transaction is not being carried out at arm’s length pricing.
- Transparency Gaps – Financial statements and board decisions may obscure related party impact.
- Regulatory Backlash– Non-compliance opens door to fines, reputational damage, and legal scrutiny.
These pitfalls highlight why a dedicated review and approval process – featuring audit committees, board oversight, and shareholder nods is crucial. Hence, strong compliance frameworks and tools are no longer optional – they are essential.
Final Words
Related Party Transactions may operate within familiar circles, but their outcomes reverberate far beyond. Recognizing what they are, why they matter and following regulations and transparency is the key to ensuring ethical, fair, compliant and sustainable corporate governance. Software like Affinisio(RPT) are specifically designed to automate the identification, tracking, governance and reporting of Related Party Transactions in a fully internal environment integrated with your ERP.
