What is a related-party transaction? 

Organisations often leverage available resources and transact within the group or affiliated entities. This arrangement between the two parties is termed as related-party transaction (RPT). Some common examples of related parties include holding companies, subsidiaries, branch offices, shareholder groups, associate group entities, key management personnel etc.

While the concept of RPT is legitimate and is regulated under various laws, typically these transactions are alleged of being conflicting to the interests of minority shareholders and external stakeholders of an organisation. For example: A subsidiary company paying a management/royalty fee to its holding company not commensurate with the benefit received.

Understanding the provisions

Provisions pertaining to the RPT are governed by Section 188 of the Companies Act, 2013, which came into force from 1 April 2014 and the SEBI (LODR) Regulations, 2015. These provisions lay down the approval process and mandate the disclosure of RPTs that can provide stakeholders with necessary information to substantiate the impact of RPTs.

The regulatory environment requires extensive disclosures of RPT, approval mechanisms to be adhered to and above all, the stipulation that the RPTs be conducted at arm’s length price. Notwithstanding the regulatory framework around RPTs, there may be many reasons challenging the governance and ensuring transparency around them. It could be either the uniqueness of the transaction or lack of substantial policy and/or maintenance of robust supporting documentation.  Therefore, making it inevitable for the companies to rethink on how they view RPT governance, regulatory oversight and creation of robust transparent documentation.

What does RPT include

  • Sale, purchase or supply of any goods or materials
    Sale, purchase or supply of any goods or materials
  • Sale, purchase or lease of property
    Sale, purchase or lease of property
  • Availing or rendering of any services
    Availing or rendering of any services
  • Investment and financial transactions including but not limited to inter-company loans, guarantee
    Investment and financial transactions including but not limited to inter-company loans, guarantee
  • Any other transaction influenced or controlled by a related party
    Any other transaction influenced or controlled by a related party

Key legislations governing RPT

  • The Companies Act, 2013 (the Act) and SEBI (Listing Obligations and Disclosure requirements) regulations, primarily outline the policies and compliance requirement for RPT.
  • The Income-tax Act covers RPT between two domestic related parties to the extent that either of the entities is availing tax. GST and special valuation law lay down requirements for related party supply.
  • Regulations require RPTs to be undertaken in the ordinary course of business on an arm’s length basis.
  • Robust RPT policies and compliance requirements instill more responsibility and accountability for the key management personnel, board members, independent directors, audit committee members.
  • Penal provisions in case of RPT-related non-compliance.

Four guiding principles of good governance

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Case Studies

Aviation
A promoter had alleged a co-promotor for exercising undue control on related-party transactions and violation of corporate governance norms. The share price of the company crashed. As a result, SEBI intervened and appointed an adjudicating officer to settle the dispute.
FMCG
An incident of diversion of funds to related parties of one of the largest Indian alcohol beverage companies. As a result, SEBI prohibited directors from dealing in securities for a period of 3 years and barred them holding the position of director/ KMP for a period of up to 5 years.

Case Studies

Real Estate
Directors of a real estate giant failed to discharge their governance responsibilities and consented to preferential, undervalued and fraudulent RPTs. As a result, the Supreme Court prohibited them from alienating their personal properties or assets in any manner.
Power
Conflict between the company and its chairman on usage of funds and land assets by promoter-connected entities, borrowings against the assets of the company for the benefit of group companies, and vendor transactions with promoter-connected entities. This resulted in share price tumbling down, removal of Chairman and led to investigation of stakeholder’s role.

Grant Thornton Bharat advantage

A comprehensive approach to a holistic governance framework

Grant Thornton Bharat has a team of seasoned professionals who assist leading companies across verticals including financial services, real estate, manufacturing and consumer, in undertaking RPT review and benchmarking from Corporate Governance perspective.

Our bespoke solution aims at a comprehensive review of the RPTs along with the underlying  documentation and related approval processes. As a value add, we share best practices to improve the RPT governance systems and processes from a corporate governance standpoint. Our findings can be relied upon for presentation before the audit committee/the board of directors.

Compliance review
  • RPT compliance review under various statutes
  • Risk identification and grading
  • Risk mitigation
RPT policies and approval process review
  • Robust testing and review of policies and processes
  • Identification of areas of improvement
  • Corrective measures
Arm’s length benchmarking
  • Review internal and external comparable data for benchmarking
  • Undertaking arm’s length analysis commensurate with function, asset and risk profile of the related parties
Standard operating procedures
  • Develop SOPs for covering the RPT lifecycle
  • Provide inputs for strengthening RPT policy framework
Domain insight
  • Cross-functional experts from tax and regulatory, forensic, transfer pricing, governance, risk and operations etc.
  • Inputs from technology domain experts
Why Choose us
Our bespoke solution

Grant Thornton Bharat has a team of seasoned professionals who assist leading companies across verticals including financial services, real estate, manufacturing and consumer.

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