Understanding the Risk Landscape of RPTs
Related Party Transactions (RPTs) are integral to modern business operations – enabling collaborations, optimizing resources, and leveraging internal synergies. However, their unique nature makes them highly sensitive and prone to misuse. While regulatory frameworks such as SEBI’s LODR Regulations and the Companies Act impose stringent guidelines, the real challenge lies in ensuring transparency and preventing misuse.
The Hidden Drivers of RPT Challenges
1) Conflicts of interest – Objectivity is Compromised
One of the most significant risks is the inherent conflicts of interest in RPTs. When company decision-makers have personal stakes in the transactions they approve, objectivity is compromised. Deals may be structured to benefit internal people rather than the company, undermining corporate integrity.
2) Minority Shareholder Exploitation – Silent Value Erosion
Improperly priced RPTs often harm minority stakeholders and may lead to over-invoicing, underpricing or asset diversion. Instances such as overpaying for goods or services from a related party or selling assets below the market value erode shareholders value and damages investor confidence.
3) Financial Misrepresentation – Distorting the True Picture
When RPTs are misused to inflate revenues, hide losses, or manipulate balance sheets, it leads to inaccurate financial reporting. Notable corporate scandals globally have involved related party dealings used to mask financial instability. Such misinterpretation invites severe regulatory actions and litigation.
4) Reputational Fallout – The Cost of Non-Compliance
A single non-compliant transaction can trigger audits, penalties, proxy advisor objections and public backlash. Worse still, reputational damage often far outweighs the immediate financial penalties, eroding market trust over time. Rebuilding trust after such incidents is difficult and can take years- if at all.
Preventing the Pitfalls – A Modern and Digital Approach
Traditional methods of managing RPTs – manual disclosures, scattered documentation, and periodic reviews – are no longer sufficient. A proactive, technology-driven solution which offers the following advantages to safeguard against these risks is paramount for companies.
- Continuously scans transactions for potential conflicts and flags anomalies in real time- a Related Party Transactions Monitoring System.
- Acts as a centralized Related Party Management System, maintaining a centralized related party database, tracking approvals, and creating an audit-ready trail- an Automated Related Party Compliance Tool
- Related Party Transaction Reporting System to simplify the process of regulatory reporting of RPTs, ensuring timely and accurate compliance with SEBI norms.
- An Application for Tracking and Managing RPT Governance to empower boards and audit committees with actionable insights, facilitating informed decision-making.
Such digital solutions not only mitigate risk but also enhance corporate governance by creating a transparent, verifiable process.
Conclusion
Related Party Transactions aren’t inherently bad – they are often essential to growth and efficiency, but opaque practices and inadequate oversight are. Without proper oversight, they can become company’s biggest governance liability.
By integrating robust regulatory practices with digital compliance tools that facilitate transparent reporting, businesses can transform RPTs from a potential risk into a hallmark of accountability and trust, protect interests of minority shareholders and maintain market confidence.
Affinis(RPT) – a future-ready, centralized governance system facilitating automated monitoring, tracking and reporting of RPTs ensures that RPTs become a testament to accountability rather than controversy.
