Related Party Transactions (RPTs) are common in family-run businesses, companies, and joint ventures, where companies engage with entities or individuals they are closely connected to, such as directors, key managerial personnel, their relatives, or associated firms. Indian law imposes strict procedural and disclosure requirements under the Companies Act, 2013 and SEBI (LODR) Regulations. Companies must ensure that such transactions are either at arm’s length and in the ordinary course of business, or else are approved by the Board, Audit Committee, and shareholders, with proper filings and transparent reporting.
Who is a Related Party?
As per Section 2 (76) of the Companies Act, 2013, the following entities or individuals are classified as “related parties”:
- Directors or key managerial personnel (KMP) of the company or its holding company.
- Relatives of directors or KMPs.
A relative includes:
- Spouse
- Parents
- Children
- Siblings
- In-laws (to some extent) (as per Section 2(77) and Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014)
- Any firm in which a director, manager, or their relative is a partner.
- Private companies in which a director or manager is a member.
- Public companies in which a director or manager holds more than 2% along with their relatives.
- Any body corporate whose Board of Directors acts on the advice of a director or manager.
- Holding, subsidiary, associate, or joint venture companies.
For listed companies, SEBI regulations further include promoter groups, entities with 10% or more shareholding, and those receiving benefits from transactions, even indirectly.
What is a Related Party Transaction?
A related party transaction is a deal or arrangement made between two parties who have a pre-existing relationship, such as business partners, or different companies owned by the same person.
What Qualifies as a Related Party Transaction?
As per section 188 of the Companies Act, 2013, the following transactions are related party transactions:
- Sale, purchase, or supply of goods or materials.
- Selling or buying property.
- Leasing of property.
- Availing or rendering of services.
- Appointment of agents for any of the above.
- Appointment of a related party to an office or place of profit.
- Underwriting of subscription for securities or derivatives.
NOTE: These transactions are allowed only if:
- They are part of the company’s regular business
- They are conducted on fair terms
Need for Related Party Transactions (RPTs)
- Efficiency and convenience: Related parties reduce the time spent finding new vendors or partners.
- Business synergy: Companies within the same group or under common control can enhance coordination and productivity.
- Support for new or smaller entities: Larger or established companies can support newly formed or related entities through related-party transactions.
- Financial control: In group structures, internal transactions can help manage cash flow, tax planning, and overall group strategy.
- Access to specialised services: Using related party transactions, the company can maintain quality and trust among its own entity.
Conditions for Eligibility
A company can enter into a related party transaction only if:
- The transaction is in the ordinary course of business, i.e., part of regular business activities.
- The transaction is done at arm’s length, i.e., on terms that would apply between unrelated parties
If either condition is not met, then the transaction must:
- Be approved by the Board of Directors by a resolution.
- Be approved by shareholders via special resolution, in some cases (especially when thresholds under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 are crossed).
NOTE: The related party cannot vote on the special resolution if it is a shareholder.
Who Approves the Related Party Transactions?
1. Board Approval
If the transaction is not at arm’s length or not in the ordinary course of business, the company must seek Board approval by resolution. This is applicable even for private companies.
Important points:
- Interested directors must not be present during the discussion or vote.
- Transactions that meet or exceed prescribed thresholds under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, need board consent even if they are at arm’s length.
Thresholds:
- Sale or purchase of goods/services exceeds 10% of turnover or ₹100 crore (whichever is lower).
- Property transactions exceeding 10% of net worth or ₹100 crore.
- Leasing of property exceeding 10% of net worth or ₹100 crore.
- Appointment to office or place of profit with remuneration above ₹2.5 lakh per month.
2. Audit Committee Approval (for Listed and Certain Unlisted Companies)
Every listed company and specified public company must get prior approval of the Audit Committee for all RPTs:
- Approval for each transaction individually.
- Annual omnibus approvals for routine transactions.
Omnibus approvals must specify:
- Transaction name and nature.
- Duration and maximum value.
- Commercial rationale.
- Basis of pricing.
All RPTs approved by the Audit Committee are reviewed at least quarterly.
3. Shareholders’ Approval
If transactions exceed certain thresholds, they also require approval from shareholders via an ordinary resolution:
- Sale or purchase of goods exceeding 10% of turnover or ₹1,000 crore (whichever is lower).
- Leasing of property exceeding 10% of net worth or ₹1,000 crore.
- Services exceeding 10% of turnover or ₹1,000 crore.
- Any other transaction defined as “material” by SEBI or internal policies.
Additional conditions:
- Related parties are not allowed to vote on such resolutions.
- For wholly-owned subsidiaries, certain exemptions may apply.
Disclosure Requirements
- Disclosure by Interested Directors
Before a related party transaction is discussed or approved, any director who is directly or indirectly interested in the transaction must disclose the nature of their interest. This is done by submitting Form MBP-1 at the first Board meeting in which the transaction is considered or whenever there is any change in their interest.
- Filing with the Registrar of Companies (ROC)
Once the Board or shareholders approve a related party transaction through a resolution, the company has to file this resolution with the Registrar of Companies (ROC) by submitting Form MGT-14 within 30 days. The form is accompanied by the certified resolution, explanatory statement, and any supporting justification for the transaction.
- Maintenance of Register of Related Party Contracts (Form MBP-4)
The company must also maintain a Register of Contracts and Arrangements with Related Parties in Form MBP-4. This register must contain details such as the date of the transaction, names of the parties involved, the nature and value of the transaction, and the approvals obtained. It must be signed by all directors present at the next Board meeting and kept at the company’s registered office.
- Disclosure in Notes to Accounts (Financial Statements)
At the end of every financial year, companies are required to disclose related party transactions in the Notes to Accounts section of their financial statements. This disclosure must include the names of related parties, the nature of the relationship, the type and volume of transactions, and any outstanding balances. These disclosures are made in accordance with Accounting Standard (AS) 18 or Indian Accounting Standard (Ind AS) 24, depending on the applicable reporting framework.
- Disclosure in the Board’s Report (Form AOC-2)
In addition to the Notes to Accounts, the company must disclose all material related party transactions in the Board’s Report, which forms part of the Annual Report. This disclosure is made using Form AOC-2, which provides details such as the name of the related party, the nature of the transaction, and the relationship.
- Disclosures by Listed Companies under SEBI Regulations
Listed companies have additional responsibilities under Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. They must submit half-yearly disclosures of all related party transactions to the stock exchanges in a prescribed format. These disclosures must also be published on the company’s official website and included in the Corporate Governance section of the Annual Report.
Summary Table
| Stage | Disclosure To | Form/Document |
| Before transaction | Board of Directors | Form MBP-1 |
| Audit Committee | Agenda & summary | |
| Shareholders | Special Resolution + Sec 102 | |
| ROC | Form MGT-14 | |
| After approval | Internal Register | Form MBP-4 |
| At year-end | Financial Statement | Notes to Accounts |
| Board’s Report | Form AOC-2 | |
| Periodically | Stock Exchange | SEBI RPT Format |
| Company Website | Web disclosure |
Conclusion
Related Party Transactions, if not properly governed, can lead to misuse of company assets and erosion of minority shareholder confidence. Companies must ensure they obtain necessary board and shareholder approvals, make timely disclosures in their financials, maintain registers like MBP-4, and file forms like MGT-14 with the ROC. A well-documented RPT policy, regular training of directors, and robust internal controls are no longer optional but essential. Ultimately, managing RPTs responsibly is not just about legal compliance, but also about preserving corporate integrity and building long-term trust with stakeholders.
