Related-Party Transactions: The Governance Risk Hidden in Ordinary Business
Current position
Companies Act requirements, accounting standards and SEBI LODR obligations can apply simultaneously. For listed entities, a material related-party transaction is generally tested against the lower of ₹1,000 crore or 10% of annual consolidated turnover, with detailed rules for approvals, subsidiaries and aggregation. The exact regulation and financial-year base must be checked before action.
How it works
Identify relationships before the transaction, not after audit. Promoters, directors, key management, relatives, controlled entities and significant influence can create a related-party link.
Arm’s-length pricing is evidence-based. Comparable quotes, cost-plus analysis, independent valuation and service deliverables are stronger than a board statement that terms are fair.
Multiple small contracts may need aggregation. Routing a transaction through a subsidiary or intermediary does not necessarily remove the related-party character.
| Issue | Current position | Why it matters |
|---|---|---|
| Listed-entity materiality | Lower of ₹1,000 crore or 10% turnover | Annual consolidated turnover; current rules |
| Core approvals | Audit committee and, where applicable, shareholders | Related parties may face voting restrictions |
| Accounting | Ind AS 24 disclosures | Relationship and transaction substance matter |
Practical example
A listed company buys logistics services worth ₹700 crore from a promoter-linked entity and its subsidiary commits another ₹400 crore under a connected arrangement. Reviewing each contract alone can miss aggregate materiality. The audit committee should examine relationship, business need, benchmarking, approval route and disclosure before commitment.
Action checklist
- Maintain a group-wide related-party and beneficial-ownership register.
- Screen vendors and customers before onboarding and annually thereafter.
- Aggregate connected transactions and track materiality continuously.
- Obtain benchmarking, valuation and clear deliverables.
- Ensure audit committee, board and shareholder approvals precede commitment.
Evidence and document checklist
- Relationship and beneficial-ownership declarations.
- Contracts, invoices, deliverables and payment trail.
- Comparable bids or independent valuation.
- Audit committee/board/shareholder papers and minutes.
- Stock-exchange and financial-statement disclosures.
Common mistakes
- Treating ordinary course as automatically arm’s length.
- Splitting contracts to avoid a threshold.
- Relying only on a director’s declaration.
- Approving after goods or services have already been received.
Red flags
- Round-value consulting fees without deliverables.
- Counterparty bank account changes to a related entity.
- Rapid growth in promoter-group receivables.
- Minority shareholders receive incomplete rationale.
Escalation and complaint route
Escalate conflicts to non-interested directors and the audit committee. Listed-entity disclosure or approval failures may require exchange and SEBI advice; Companies Act breaches require company-secretarial and legal review.