Related-party transactions: meaning, how they work in India

A related-party transaction (RPT) is a transfer of goods, services, money or rights between a company and someone with a close link to it. The link may be ownership, a board seat, family ties or shared control. Examples include a founder renting an office to the startup, a group company supplying raw material, or the company lending money to a subsidiary.

Such deals are not wrong in themselves. A founder-owned warehouse may be the most practical option nearby, and a parent company may genuinely offer the cheapest cloud credits. The concern is that the person on one side can influence the price on the other. That is why the law asks for disclosure, and sometimes for independent approval.

Section 2(76) of the Companies Act, 2013 defines the term for companies. Broadly it covers directors and key managerial personnel, their relatives, firms and companies in which a director or relative holds an interest, the holding company, subsidiaries and fellow subsidiaries. Ind AS 24, the accounting standard on related-party disclosures, has a similar but not identical list, and listed companies also follow the SEBI listing rules.

For a startup, the practical list usually includes the founders and promoters, their families, any firm they control, associates and joint ventures, and the senior management team. In some cases investors with board seats are included as well. The exact test differs across the three sources, so a filing normally applies the widest definition that fits.

As of November 2026, the main layers are these. Section 188 of the Companies Act requires board consent for specified related-party contracts, such as sale or purchase of goods, leasing property, hiring services or appointing someone to a paid office. Where a company has an audit committee, that committee reviews the deal first.

Above monetary limits set in the rules, and where the deal is not in the ordinary course of business or not at arm's length, shareholders must also approve it, and the related party cannot vote. Arm's length means the price is what two unconnected parties would agree. Companies disclose these contracts in the board's report on a prescribed form.

Listed companies face a second layer in Regulation 23 of the SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015. Every RPT needs audit committee approval, and a material one needs shareholder approval by a vote in which related parties abstain. According to law-firm summaries of the Fifth Amendment of 2025, notified in November 2025, the old flat test for materiality was replaced by turnover-linked bands, with a 10% of turnover threshold for smaller companies. Check the current schedule for the exact bands.

Under section 188, a deal that needed approval and did not get it can be ratified within a short window, and if it is not ratified it can be cancelled at the board's option. Secondary guides also describe fines for officers and the company, with larger amounts for listed companies, but the figures differ between sources, so check the current section text. For a listed company, a breach of the LODR rules can also lead to action from SEBI and the stock exchanges.

For an investor reading a DRHP, a note about a past RPT that was approved late is a useful clue about the quality of governance, even if the amount was small.

For an investor, an RPT is a possible leak. Money paid to a founder's other company is money that does not stay in the startup. It can also hide the real profit: a startup that buys supplies from a promoter-owned supplier at a high price looks less profitable than it should, and one that sells to a related buyer at a high price may look larger than it is.

For the company, RPTs can be useful. A parent may guarantee a loan, a group firm may share staff, and a founder may lend money in a hard quarter. The aim for a healthy company is simple: keep the deals few, priced fairly, written down and approved by people who have no stake in them.

A Draft Red Herring Prospectus (DRHP) is the document a company files with SEBI before an IPO. Related-party dealings appear in several places, and the main ones are listed below.

• Restated financial statements: a note on related-party disclosures under Ind AS 24 lists each party, the relationship and the amount for every year covered.
• The Promoters and Promoter Group, and Group Companies sections: these name the connected businesses and describe what they do, including any that compete with the issuer.
• Risk factors: companies often warn that RPTs may not be at arm's length or that conflicts may arise.
• Outstanding litigation and contingent liabilities: guarantees given for related parties can appear here.
• Objects of the issue: a section on how IPO money will be used shows whether any is going to a related party, such as repaying a promoter loan.

Arm's length pricing means the terms match what unconnected parties would agree. Companies usually test it by comparing the price with quotes from outside suppliers, by asking an independent valuer or a chartered accountant to certify the rate, or by following a published benchmark such as a market rent. Where a company has operations in more than one country, transfer pricing rules under the Income-tax Act also ask for a documented arm's length price for deals between group firms, which is a related but separate requirement.

A good filing explains the method it used. A weak one only states that the deal is at arm's length. Readers should treat the second kind as a prompt for questions rather than as proof. The audit committee minutes, which a DRHP does not reproduce, are where the real review sits, so the committee's independence matters as much as the label on the deal.

No single number marks a problem, so readers look at patterns across the years of the restated financials. A few signs deserve a closer look, and each has an innocent explanation in some cases.

• The related-party amounts are large compared with revenue or net worth.
• Loans to or from promoters keep growing, or are repaid out of IPO money.
• The same group company appears as both supplier and customer.
• Pricing terms are vague, or the filing does not say how arm's length was tested.
• Rent, royalty or fees paid to promoters rise faster than the business.
• New related parties appear in the last year before the filing.

A conflict of interest is the broader idea: a person's own interest could affect a company decision. An RPT is a specific, measurable deal that comes from such a link. A promoter loan is just one kind of RPT, usually a loan from the founder to the company or the other way round.

Not every conflict creates a transaction, and not every RPT proves a conflict. Reading them together gives a fuller picture of who benefits from the company's cash. This guide is general information and not legal, tax or investment advice, so check the rules for any real deal with a professional.