Why Related Party Transactions Deserve More Scrutiny Than They Get

Written by the OmnaData Risk Intelligence Team · Reviewed against the Companies Act, 2013 and the SEBI (LODR) Regulations, 2015 (as amended) · Updated July 2026

The Transaction Hiding in Plain Sight

Every year, thousands of Indian companies report related party transactions in their board reports and annual filings — a supply contract with a promoter-owned firm, a loan to a subsidiary, office space leased from a director's family trust. On paper, these look like routine disclosures. In practice, they are among the least scrutinized categories of corporate risk, precisely because they hide behind the appearance of compliance.

That is the core problem this post addresses: RPTs are common and frequently legitimate, yet structurally exposed to conflicts of interest — and they typically receive far less independent scrutiny than their risk profile warrants, especially in India's promoter-driven corporate landscape.

What Counts as a Related Party Transaction

Under Section 188 of the Companies Act, 2013, an RPT is any contract or arrangement between a company and a "related party" — defined broadly under Section 2(76) to include directors, key managerial personnel, their relatives, holding and subsidiary companies, and firms in which they hold a substantial interest. Section 188(1) lists seven categories that trigger approval requirements: sale, purchase or supply of goods; buying, selling or leasing property; availing or rendering services; appointing an agent for purchase or sale; appointing a related party to an office of profit; underwriting securities; and related-party loans, guarantees and investments (governed alongside Sections 185–186).

In practice, this covers scenarios as ordinary as a company buying raw materials from a promoter-owned supplier, and as consequential as a listed entity guaranteeing a loan for a group company under financial stress. The transaction type is rarely the problem — the terms, and who benefits from them, are.

Why RPTs Demand More Scrutiny Than They Get

1. Conflicts of interest are built into the structure. When a director or promoter negotiates on behalf of the company with an entity they also control, the usual checks of arm's-length bargaining break down. The law recognizes this directly: an interested director must abstain from voting on the resolution — a structural admission that RPTs cannot be trusted to self-correct.

2. They create room for self-dealing and fund siphoning. Inflated pricing on a related-party purchase, an undercollateralized loan to a group entity, or a management fee routed to a promoter-owned shell can all move value out of a company under the cover of a "transaction" — one of the most common vectors for siphoning funds in Indian corporate history.

3. They distort fair value and transparency. A related-party sale priced below market, or a purchase priced above it, quietly transfers value between entities without ever showing up as a transfer. Reported revenue, margins and asset values can all be shaped by deals that never had to clear a genuine market test.

4. They can misrepresent financial health. Revenue booked from a related party isn't the same quality as revenue from an independent customer — but it looks identical on a profit and loss statement. Loans disguised as trade advances, or circular transactions between group companies, can inflate turnover and obscure a deteriorating balance sheet from lenders and minority shareholders alike.

5. Confidence, once eroded, is expensive to rebuild. Investors and lenders price in governance risk. Once a pattern of opaque related-party dealing comes to light, the market's discount rarely stays proportional to the transaction value alone — it reflects a broader loss of trust in every number the company reports.

India's Regulatory Response — and Its Gaps

India's framework for related party transactions has genuinely matured, but it still leaves room between the letter of disclosure and the substance of scrutiny.

Companies Act, 2013 (Section 188): Board approval is mandatory for every RPT falling within the seven statutory categories, regardless of value. Where a transaction crosses the thresholds prescribed under the Companies (Meetings of Board and its Powers) Rules, 2014, shareholder approval by ordinary resolution is also required, with the interested director abstaining from both discussion and vote. Details are captured in Form AOC-2, annexed to the Board's Report, with penalties under Section 188(4) for non-compliance.

SEBI (LODR) Regulations, 2015 (Regulation 23): For listed companies, every RPT requires prior audit committee approval, and material RPTs require shareholder approval too. For years, "material" meant exceeding the lower of ₹1,000 crore or 10% of consolidated turnover — a static test that over-regulated large conglomerates while barely touching mid-sized listed companies. SEBI's Fifth Amendment to the LODR Regulations, notified 19 November 2025, replaced that flat threshold with a scale-based, turnover-linked framework under a newly inserted Schedule XII, and extended audit committee oversight to certain RPTs carried out by unlisted subsidiaries even where the listed parent isn't directly a party.

Where the gaps remain: Private and unlisted companies sit outside SEBI's stricter listed-company oversight, leaving much of India's corporate economy with lighter scrutiny. Layered structures routed through intermediate entities can evade formal triggers even when the underlying relationship is real. And the framework still leans on self-disclosure: a company that misclassifies a related party has effectively opted out of the entire approval chain.

What Happens When Scrutiny Fails

The cost is not theoretical. India's corporate history includes cautionary examples: governance failures at Satyam Computer Services in 2009 and the IL&FS group crisis in 2018 both involved, among other lapses, fund flows between related entities that weren't caught in time — dealings that looked routine in isolation but concealed a larger structural problem once examined together.

When RPT scrutiny fails, the consequences compound: investor losses as stock prices reprice once the risk becomes visible; credit exposure for lenders that financed against statements shaped by undisclosed related-party flows; regulatory action from SEBI, the Registrar of Companies, or the Serious Fraud Investigation Office; rating downgrades; and reputational damage that outlasts the transaction itself.

Closing the Gap: From Disclosure to Real Scrutiny

Reading an RPT disclosure in isolation rarely tells you what you need to know. The more useful question is structural: who actually sits behind the counterparty, how many other transactions connect back to the same promoter group, and does the pricing hold up against comparable arm's-length deals? Answering that means mapping ownership and director networks across group entities — not just reading one year's related-party footnote.

This is the layer data-driven due diligence adds. OmnaData's reports combine director network mapping, ownership and related-party structure, and multi-year financial analysis with analyst review — so a related-party link that a single filing wouldn't reveal on its own becomes visible once the surrounding data is connected. For banks, NBFCs, enterprise risk teams and investors evaluating an Indian counterparty, that mix of verified data and human interpretation is what turns a compliance checkbox into genuine scrutiny.

Frequently Asked Questions

What is a related party transaction (RPT)?

A contract or arrangement between a company and a party connected to it by ownership, control or relationship — a director, promoter, subsidiary, or their relatives — as defined under Section 2(76) and regulated under Section 188 of the Companies Act, 2013.

Are related party transactions illegal in India?

No. RPTs are legal and common, provided they follow the required approval process. The transactions themselves aren't the problem; unapproved, undisclosed or unfairly priced ones are.

Who is considered a "related party" under Indian law?

Directors, key managerial personnel and their relatives, holding and subsidiary companies, associate companies, and any firm in which a director or manager holds a significant interest, per Section 2(76) of the Companies Act, 2013.

What approvals does a material related party transaction need?

Board approval always, plus shareholder approval by ordinary resolution above prescribed thresholds, with the interested director abstaining. Listed companies additionally need prior audit committee approval under SEBI's LODR Regulation 23, and shareholder approval for material RPTs under the scale-based framework introduced in November 2025.

How can investors or lenders spot hidden related-party risk?

By mapping the counterparty's ownership structure, director overlaps and group affiliations, and comparing related-party pricing against comparable arm's-length deals across multiple years — not just the year in question.

Key Takeaways

• RPTs are common and usually lawful, but structurally prone to conflicts of interest.
• India's Companies Act and SEBI's LODR Regulations require disclosure and approval — SEBI's November 2025 amendment moved materiality testing to a scale-based, turnover-linked framework.
• Disclosure compliance isn't the same as genuine scrutiny; layered structures and self-reported classifications can still slip through.
• The best defense is connecting the dots — ownership mapping, director networks and multi-year financial analysis — not reading one disclosure in isolation.

Navigating related party risk starts with visibility into who is really on the other side of a transaction. Explore OmnaData's due diligence reports to see how verified ownership, director-network and financial data come together — or speak to our risk intelligence team about a specific counterparty.

This article is for general informational purposes and does not constitute legal or financial advice. Companies should consult a qualified company secretary or legal counsel for guidance on specific related party transaction compliance requirements.