Related Party Transactions: Disclosure Requirements Under Ind AS 24 & Companies Act

Three Layers of Compliance

Who Is a "Related Party" Under Ind AS 24?

The Ind AS 24 definition is based on relationships of control or influence, not just shareholding thresholds. It covers:

• Key management personnel (KMP): Directors, CEO, CFO, and other persons with authority and responsibility for planning, directing, and controlling the entity's activities — plus their close family members
• Group entities: Parent, subsidiaries, fellow subsidiaries, and any entity that is part of the same group
• Associates and joint ventures: Of the entity itself, or of any member of its group
• Entities controlled by KMP or their relatives: Even an entity with no direct shareholding link can be a related party if a director's close relative controls it
• Post-employment benefit plans: For the benefit of employees of the entity or a related entity

What Ind AS 24 Requires to Be Disclosed

For each category of related party, financial statements must disclose:

• The nature of the related party relationship
• The amount of transactions during the period (purchases, sales, services rendered/received, leases, loans, guarantees, etc.)
• Outstanding balances at year-end, including terms and conditions, whether secured, and the nature of consideration to be provided in settlement
• Provisions for doubtful debts related to outstanding balances with related parties, and any expense recognised for bad/doubtful debts from related parties
• Compensation of key management personnel, split into categories (short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits, share-based payments)

Section 188: Board and Shareholder Approval

Section 188 of the Companies Act, 2013 requires board approval (via resolution at a board meeting, not by circulation) for contracts or arrangements with related parties involving matters such as sale/purchase of goods or property, leasing of property, availing or rendering of services, appointment of agents, and appointment to any office or place of profit. For transactions exceeding prescribed thresholds (or not in the ordinary course of business or not on an arm's length basis), shareholder approval by ordinary resolution is also required — with related parties who are interested in the transaction barred from voting. Listed companies face an additional, stricter "material related party transaction" threshold under SEBI LODR Regulation 23, which also requires audit committee pre-approval.

Section 40A(2): The Tax Angle

Even a transaction that is fully approved under Section 188 and properly disclosed under Ind AS 24 is not automatically safe from tax scrutiny. Section 40A(2) of the Income Tax Act allows the assessing officer to disallow expenditure paid to specified related persons (relatives, directors, persons with substantial interest, and their relatives) to the extent it is considered excessive or unreasonable relative to fair market value, legitimate business need, or benefit derived. This makes arm's-length pricing documentation — comparable quotations, market rate benchmarking, or third-party valuations — important even for purely domestic related party transactions, separate from formal transfer pricing documentation required for cross-border transactions.

Practical Checklist for Finance Teams

• Maintain an updated related party register covering directors, KMP, their close relatives, and entities they control or significantly influence — refresh at least annually and whenever board composition changes
• Flag related party transactions at the point of approval, not retrospectively at audit time — this avoids scrambling for board resolutions after the fact
• Maintain pricing benchmarks (market quotes, comparable transactions) for significant related party transactions to support both Section 40A(2) and audit queries
• Reconcile the related party note in the financial statements against the Section 188 register and the audit committee minutes — discrepancies are a common audit observation

Related party transactions often intersect with other compliance areas covered on Finin2min, including balance sheet analysis (related party balances often sit within "other receivables/payables") and MSME payment compliance when a related entity is also a registered MSME supplier.