Related-party transactions: disclosure that doesn't invite scrutiny

Related-party transactions sit at the intersection of accounting, company law, and securities regulation. The disclosure framework is built into three separate regimes — Ind-AS 24, Sections 188 and 177 of the Companies Act 2013, and SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulation 23 for listed companies. Each has different definitions, different thresholds, and different consequences for non-disclosure.

Most RPT problems are not deliberate concealment. They are housekeeping problems. A transaction that should have been disclosed slips through because no one was tracking it. By year-end the auditor is asked to reconcile transactions with parties no one identified as related, with approvals no one obtained, and with terms no one tested for arm's-length pricing.

Who counts as a related party

Ind-AS 24 sets the accounting definition. A related party is one of the following:

Subsidiaries, associates, and joint ventures of the reporting entity.

Key managerial personnel of the entity or its parent. KMP includes the CEO, MD, CFO, company secretary, whole-time directors, and other officers reporting directly to the board.

Close family members of KMP. Spouse, dependent children, dependent parents, brothers and sisters, and their spouses are typically captured.

Entities controlled, jointly controlled, or significantly influenced by KMP or their close family members. This is where the definition reaches outside the formal corporate structure. A director's brother who owns 30% of a private company that supplies the entity is a related-party transaction. Most operating teams do not know that.

Post-employment benefit plans for employees of the entity or its related parties.

The category that gets missed most often is the fourth one. A director's spouse owns a marketing agency. The marketing agency invoices the entity ₹40 lakh during the year. The transaction passes through accounts payable without anyone flagging the relationship. At year-end the auditor asks for the related-party register and the transaction is not on it.

What transactions to disclose

Ind-AS 24 covers the universe of transaction types broadly: sales and purchases of goods or services, leases, licenses, royalties, guarantees, loans, equity contributions, settlement of liabilities, and management compensation.

Disclosure should be by type of transaction and by category of related party — not lumped together. The reader should be able to see that ₹2.5 crore of services were purchased from entities controlled by KMP, separate from ₹1.8 crore of services purchased from subsidiaries.

Outstanding balances at year-end with related parties — receivables, payables, guarantees — get disclosed separately, with information on whether they are secured or unsecured and the terms of settlement.

The Section 188 layer

Section 188 of the Companies Act adds a substantive approval requirement on top of disclosure. Specified RPTs require board approval and, above prescribed thresholds, shareholder approval through a special resolution.

The transactions covered include sale or purchase of goods or services, sale or purchase of property, leasing of property, appointment of any related party to a place of profit, and underwriting of securities. The thresholds are defined in the Companies (Meetings of Board and its Powers) Rules — generally 10% of turnover or net worth for sales or purchases, with absolute floors.

Section 188 has an exception. Transactions in the ordinary course of business at arm's-length pricing do not require Section 188 approval — though they still require disclosure under Ind-AS 24 and reporting under CARO clause (xiii).

The 'ordinary course of business at arm's length' defence is over-used. Companies invoke it for transactions that are clearly not in the ordinary course — a one-off property sale, a loan to a director's company, a management-services fee paid to a holding entity. The auditor will test the defence. If the defence does not hold, the absence of Section 188 approval is a non-compliance and gets reported in CARO and to the audit committee.

Section 177 and the audit committee role

Section 177 of the Companies Act requires the audit committee (for companies required to have one) to approve or modify all related-party transactions and any subsequent modifications.

For listed companies, this is mandatory. For unlisted public companies and private companies above certain thresholds, an audit committee may also be required. Where one exists, all RPTs need its approval — not just the Section 188 specified transactions.

Companies often run RPT approvals through the full board without involving the audit committee separately. Under Section 177, the audit committee's approval is required first. The board approval comes after. Reversing the sequence is a non-compliance.

SEBI LODR for listed companies

SEBI LODR Regulation 23 adds a third regime for listed companies. The thresholds and definitions overlap with Section 188 but are not identical. The 'material' RPT threshold under LODR Regulation 23 is 10% of consolidated turnover. Material RPTs require shareholder approval through ordinary resolution.

LODR also requires the company to formulate a policy on RPTs, place it on the website, and review it every three years. The audit committee oversees compliance with the policy.

For listed companies, the disclosure obligations to the stock exchanges are real-time on material RPTs. A delay in disclosure invites SEBI scrutiny and potentially a show-cause notice. We have seen companies surface a material RPT to the auditor at year-end and then realize the stock-exchange disclosure should have happened nine months earlier.

The five disclosure failures we see most

Director's relative as a vendor or customer. The relationship is not declared by the director on the relatedparty register, often because the director did not know the spouse or sibling had transactions with the entity. Annual confirmation forms from directors and KMP should require disclosure of business relationships of close family members.

KMP shareholding in a vendor. A KMP holds 12% in a private company that becomes a vendor. The shareholding is below the 50% control threshold but above the 'significant influence' threshold of 20%. Under Ind-AS 24 this triggers related-party status. KMP do not always self-disclose at the 20% level.

Letters of comfort and guarantees. A holding company issues a letter of comfort to a bank on behalf of a subsidiary's loan. The letter is not technically a guarantee but creates an obligation. It is a related-party transaction and a financial instrument disclosure. Companies routinely fail to disclose these.

Services agreements with sister concerns. Group entities share back-office services — IT, HR, legal — under management-services agreements with cost-allocation formulas. The amounts can be material. Disclosures are often clubbed under 'other operating expenses' without the related-party split-out.

Loans within the group. Inter-corporate loans within the group are reported in the standalone financial statements but get eliminated on consolidation. The Section 186 limits on loans and investments still apply at the standalone level. We see standalone-level non-compliances frequently in growing groups where the holding company funds the subsidiaries with informal advances rather than documented loans.

What the disclosure that doesn't invite scrutiny looks like

Clean RPT disclosures share four characteristics.

A live related-party register maintained quarterly, not reconstructed at year-end. The register lists every party meeting the Ind-AS 24 definition and the underlying basis for the relationship.

A live RPT transactions log mapped to the register, updated as transactions occur. Each transaction notes the date, counterparty, nature, amount, and the approvals obtained (audit committee, board, or shareholder where applicable).

Arm's-length documentation for material transactions. Independent comparable pricing, third-party quotations, or a documented basis for why the pricing reflects market terms. The transfer-pricing study, where one exists, is a useful reference even for domestic RPTs.

Quarterly confirmations from directors and KMP. A standard form covering personal shareholdings, family business relationships, and any new disclosable interests, signed and dated. The annual board secretary's compilation of these forms feeds the related-party register.

The disclosure that invites scrutiny

The opposite pattern is familiar. The related-party register is built three weeks before the audit closes. The transactions log is reconstructed from bank statements and ledger queries. Approvals are obtained retroactively where possible. Arm's-length documentation is created during the audit. The disclosure note in the financial statements is technically complete, but the auditor's CARO disclosure under clause (xiii) flags non-compliance with Section 177 and Section 188 procedures.

Once that flag is on the public record, the next year's audit committee meeting starts with the question of how it happened. The year after that, the diligence team on the next fundraise reads the CARO note. The disclosure was not the problem. The discipline behind the disclosure was.