Related Party Transactions (RPTs) are among the most scrutinised areas in Indian corporate governance and audit. The Companies Act, SEBI LODR (for listed companies), GST law, and Income Tax Act all have specific provisions — and they do not always align, creating a complex multi-layer compliance requirement.
What Constitutes a Related Party Under the Companies Act?
Section 2(76) of the Companies Act, 2013 defines related parties broadly:
- A director or key managerial personnel (KMP) of the company
- A director or KMP of a holding, subsidiary, or associate company
- A private company in which a director or his relative holds > 2% of paid-up share capital
- A public company in which a director holds ≥ 2% paid-up share capital
- A body corporate whose Board is accustomed to act in accordance with the advice or instructions of a director
- Any firm in which a director or relative is a partner
Under GST law, the definition of "related person" includes entities with common directors or substantial common ownership, which is broader than Companies Act. Both must be satisfied simultaneously.
What Are Related Party Transactions?
Under Section 188, RPTs include:
- Sale, purchase, or supply of goods or materials
- Selling or otherwise disposing of property
- Leasing of property
- Availing or rendering of services
- Appointment to any office or place of profit (KMP positions to relatives)
- Underwriting the subscription of securities
- Any other transaction of a nature outside ordinary course of business
Approval Framework
Board / Audit Committee
| Transaction | Approval Required |
|---|---|
| RPT in ordinary course of business at arm's length | No specific approval needed if below prescribed threshold |
| RPT NOT in ordinary course or NOT at arm's length | Audit Committee prior approval mandatory |
| RPT > ₹10 crore or 10% of turnover, whichever lower (for material RPT) | Audit Committee + Board approval |
| Material RPT (listed companies) | Shareholders' special resolution |
Audit Committee Composition: Under Section 177, the Audit Committee must have at least 3 directors, majority being Independent Directors, chairperson being an Independent Director.
SEBI LODR: Additional Requirements for Listed Companies
Since SEBI's 2022 amendment to LODR (Listing Obligations and Disclosure Requirements), the RPT framework for listed companies is significantly more rigorous:
- All RPTs require prior approval of the Audit Committee (no routine exception)
- New "material" threshold: ₹1,000 crore or 10% of consolidated turnover, whichever is lower
- Listed subsidiaries: RPTs of subsidiaries with other group entities also require parent's board approval if material
- Shareholders' approval required for material RPTs and for RPTs through subsidiaries where aggregate impact is above threshold
- Cooling-off period: A fresh Audit Committee approval is needed whenever there is a material change in terms
Disclosure Requirements
Schedule V to SEBI LODR — Annual Report
Every listed company must disclose in its Annual Report:
- Justification for why the RPT is in the interest of the company
- Arm's length determination
- Aggregate value during the year
- Details of any modification to previously approved RPTs
Companies Act — Board's Report
Prescribed form AOC-2 must accompany the Board's Report:
- Details of RPTs not at arm's length (with justification)
- Material contracts at arm's length
- Director's certification that the RPT meets conditions specified
Form AOC-4 Disclosures
Financial statements filed with ROC must include Note 40 (or equivalent) — Schedule of RPTs per AS 18 or Ind AS 24.
Arm's Length Determination
The arm's length price is what an unrelated third party would charge for the same transaction under similar circumstances. Methods for determination vary by transaction type:
| Transaction | Preferred Method |
|---|---|
| Sale of goods | Compare with prices charged to third-party customers |
| Services | Compare with market rates (rate cards, quotations from vendors) |
| Loans | SBI MCLR + appropriate credit spread |
| Property lease | Registered valuer's report or market comparables |
| Brand royalty | Comparable license agreements, industry data |
Maintain written documentation of the arm's length determination before the transaction occurs, not after.
GST Implications of RPTs
Under GST, transactions between related parties are deemed to be at open market value even if no money changes hands or if the consideration is below market.
Section 15(4) read with Rule 28 of CGST Rules:
- If related parties transact, value for GST purposes = Open Market Value (OMV)
- If OMV is not determinable, use value of similar goods/services from third parties
- GST applies even on free supplies between related parties (e.g., goods sent from head office to branch)
This creates a GST liability that many companies overlook — particularly for intra-group service recharges, secondment of employees, or use of common infrastructure.
Income Tax Scrutiny of RPTs
The Income Tax Department regularly disallows expenses paid to related parties if:
- The payment is not at arm's length and appears inflated
- The related party does not have capacity to render the service (e.g., paying a director's family trust for "consulting")
- There is no underlying agreement or service delivery proof
Supporting documentation should include:
- Drafted agreement with defined scope, payment terms, duration
- Deliverables or work product from the related party
- Bank statements confirming payment
- TDS compliance (Section 194C/194J/192 as applicable)
Are your RPTs properly structured and documented?
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