Related Party Transactions (RPTs) are an integral part of modern business operations, especially for corporate groups, joint ventures, holding–subsidiary structures and promoter-driven companies. While RPTs are not inherently problematic, they often attract regulatory scrutiny because they carry a higher risk of bias, conflict of interest, tax leakages, transfer mispricing, governance failures and misuse of shareholder funds. In India, the regulatory framework governing RPTs has strengthened significantly under the Companies Act, 2013, SEBI Listing Obligations and Disclosure Requirements (LODR), Income Tax Act (especially Section 40A and Transfer Pricing rules) and various accounting standards such as Ind AS 24. As a result, businesses must adopt strong compliance practices and internal controls to manage RPTs effectively. This article presents a comprehensive understanding of RPTs, their compliance requirements, associated risks, audit considerations, governance expectations, and the role of professional firms such as https://ambaniandassociates.com/ in ensuring transparent and compliant related party frameworks. 1. Understanding Related Party Transactions An RPT is any transaction between a company and a related party, which may include: ● Directors, KMPs and their relatives ● Subsidiaries, associates and joint ventures ● Promoter groups ● Entities where directors or KMPs exercise control or significant influence ● Partnership firms or LLPs in which directors or relatives are partners ● Trusts where key personnel have influence The nature of RPTs may include: ● Sale or purchase of goods ● Transfer of assets or property ● Leasing transactions ● Rendering or receiving services ● Loans, guarantees or security ● Management contracts ● Royalty, license or technical agreements ● Purchase or sale of investments RPTs are acceptable as long as they are fair, reasonable, at arm’s length and appropriately documented and approved. 2. Regulatory Framework Governing RPTs in India 2.1 Companies Act, 2013 (Section 188 & 184) Key requirements include: ● Board approval for all specified RPTs ● Special resolution for transactions exceeding prescribed thresholds ● Exclusion of interested directors from voting ● Mandatory disclosure in Board Reports ● Maintenance of registers of contracts and arrangements ● Justification of terms and pricing 2.2 SEBI LODR Regulations, 2015 Applicable to listed companies: ● Audit Committee approval mandatory ● Shareholder approval for material RPTs ● Half-yearly disclosures to stock exchanges ● Arm’s length certification for RPTs ● Enhanced scrutiny of promoter-linked transactions 2.3 Income Tax Act RPTs often attract tax scrutiny particularly due to: ● Transfer pricing regulations ● Section 40A(2)(b) relating to unreasonable payments to related parties ● Thin capitalization rules ● General anti-avoidance rules 2.4 Accounting Standards (Ind AS 24 / AS 18) Companies must disclose: ● Nature of relationship ● Types of transactions ● Outstanding balances and commitments ● Terms and pricing This ensures transparency in financial statements. 3. Why RPT Compliance Is Critical for Businesses 3.1 Preventing conflict of interest Unsupervised RPTs may benefit directors or promoters at the cost of minority shareholders. 3.2 Maintaining tax compliance Improper pricing or artificial transactions may result in tax penalties and adjustments. 3.3 Strengthening corporate governance Transparent RPTs improve investor confidence and reduce reputational risks. 3.4 Ensuring fair financial reporting Proper disclosures avoid misstated profits and related party balances. 3.5 Avoiding penalties under Companies Act and SEBI Non-compliance leads to heavy penalties and risk of prosecution for directors. 4. Major Risks Associated with Related Party Transactions 4.1 Risk of misuse of company resources RPTs may be structured to divert funds systematically. 4.2 Mispricing and transfer misalignment Non-arm’s length pricing leads to tax issues and unfair financial reporting. 4.3 Governance failures If approvals are bypassed, it signals weak Board oversight. 4.4 Financial statement manipulation RPTs may be used to artificially inflate revenues or hide liabilities. 4.5 Fraud risk Circular transactions among related parties are often used in fraud schemes. 4.6 Undue influence of promoters Promoter-driven deals often raise concerns of bias. 5. Key Controls for Managing RPT Risks 5.1 Robust RPT Policy The company should have a documented policy defining: ● Identification of related parties ● Types of transactions ● Approval thresholds ● Pricing guidelines ● Disclosure process 5.2 Strong governance oversight Boards and Audit Committees must enforce strict protocols. 5.3 Mandatory arm’s length evaluation A fair pricing mechanism must be established through: ● Market benchmarking ● Third-party valuation ● Alternative quotes 5.4 Pre-approval controls No transaction should commence without: ● Board approval ● Audit Committee scrutiny ● Shareholder resolution (if applicable) 5.5 Continuous monitoring Businesses must monitor: ● Limit thresholds ● Materiality levels ● Contract renewals ● Outstanding balances 5.6 Documentation and record-keeping Every RPT must be supported by: ● Agreements or MOUs ● Pricing rationale ● Audit Committee notes ● Market analysis 6. Role of Audit Committee in Overseeing RPTs Audit Committee responsibilities include: ● Reviewing all RPT proposals ● Assessing arm’s length pricing ● Monitoring recurrent transactions ● Evaluating potential conflicts ● Ensuring disclosures ● Tracking deviations and exceptions The Committee must challenge management assumptions and demand justification for every RPT. 7. Internal Audit Procedures for Related Party Transactions Internal auditors play a vital role in detecting irregularities. Key audit procedures include: 7.1 Identification of related parties Auditors verify: ● Registers maintained under Companies Act ● Director declarations ● Group structure charts ● Beneficial ownership records 7.2 Verification of approval process Checking compliance with: ● Audit Committee notes ● Board minutes ● Shareholder resolutions 7.3 Testing the pricing mechanism Evaluating: ● Comparable analysis ● Market-based pricing ● Independent valuations 7.4 Review of contracts Examining: ● Scope ● Tenure ● Pricing terms ● Payment conditions 7.5 Financial statement disclosures Ensuring disclosures align with Ind AS 24. 7.6 Cross-referencing outstanding balances Ensuring no hidden transactions or off-book adjustments. 8. Common Red Flags in Related Party Transactions ● Transactions without documentation ● Round-tripping of funds ● Sudden increase in related party sales or purchases ● Loans or advances with no repayment schedule ● Inflated service fees ● Transactions routed through shell or dormant entities ● RPTs executed close to period-end to manipulate results ● Differences between substance and form Internal auditors and regulators pay special attention to these patterns. 9. Best Practices to Ensure RPT Compliance 9.1 Exact mapping of group structure Businesses should maintain an updated related party register. 9.2 Transparent Board reporting Management should report all material RPTs periodically. 9.3 Use of external experts Professional advisory firms such as https://ambaniandassociates.com/ can conduct: ● Arm’s length studies ● Transfer pricing benchmarking ● Governance reviews ● RPT compliance audits 9.4 Periodic independent review An annual RPT audit helps ensure regulatory compliance. 9.5 Training for directors and finance teams Awareness is essential for real-time compliance. 9.6 Strong ERP controls Workflow-driven approvals and automated alerts help prevent unauthorized RPTs. 10. Consequences of Non-Compliance Failure to comply with RPT rules may result in: ● Regulatory penalties ● Restatement of financial statements ● Tax disallowances and additional tax burden ● Withdrawal of investor confidence ● Legal actions against directors ● Market reputation loss SEBI has imposed multi-crore penalties on listed companies for RPT violations, showing how seriously regulators view non-compliance. 11. How CA Firms Support in Managing RPTs Professional CA firms play a strategic role by providing: 11.1 RPT policy formulation Industry-specific, governance-aligned policies. 11.2 Legal, financial and tax compliance Alignment with Companies Act, SEBI, Transfer Pricing norms. 11.3 Arm’s length analysis Benchmarking using reliable databases and economic tools. 11.4 Internal audit of RPTs Detailed verification of approvals, pricing, disclosures. 11.5 Transaction structuring Ensuring tax efficiency and regulatory acceptance. 11.6 Risk assessment and mitigation Identifying fraud risk patterns and improving controls. 12. Conclusion Related Party Transactions are unavoidable in complex business structures, but they demand a high level of transparency, governance and regulatory compliance. Businesses must ensure that every RPT is justified, appropriately priced, properly approved and clearly documented. Failure to maintain compliance can result in significant financial, legal and reputational consequences. A strong RPT framework, supported by robust internal controls, active Audit Committee oversight and independent evaluations, ensures that companies operate with integrity and fairness. With rising scrutiny from regulators and investors, organizations increasingly rely on professional advisory firms such as https://ambaniandassociates.com/ to strengthen RPT governance, conduct arm’s length studies and implement best-in-class compliance structures.