In today's interconnected business environment, related party transactions ("RPTs") are a normal and often necessary part of business operations. Companies regularly transact with subsidiaries, associate companies, joint ventures, promoters, directors and key managerial personnel to improve operational efficiency and leverage group synergies.

The challenge is not the existence of RPTs, but ensuring that they are conducted transparently, on fair commercial terms, and with appropriate oversight. When managed properly, RPTs can support business objectives. When they are not, they can create conflicts of interest, regulatory concerns and reputational risks. This makes an effective RPT framework a critical component of good corporate governance.

The regulation of RPTs in India is primarily driven by the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

The Companies Act adopts a broad definition of a "related party" and covers directors, their relatives, key managerial personnel, entities in which they hold an interest and companies under common control.

Section 188 of the Act prescribes the approval requirements for specified related party transactions. Transactions that are both in the ordinary course of business and on arm's length terms are generally exempt from Board and shareholder approval requirements under that provision. In addition, all RPTs require Audit Committee oversight under Section 177, while directors are required to disclose their interests under Section 184.

Listed entities face additional compliance requirements under the Listing Regulations, including:

• Adoption of a policy on material RPTs and dealing with RPTs;

• Prior Audit Committee approval of RPTs;

• Shareholder approval for material RPTs; and

• Periodic disclosures to stock exchanges and investors.

The regulatory framework has also expanded the scope of who may be considered a related party, reflecting the increasing focus on transparency and investor protection.

Many organisations view RPT compliance as a documentation exercise that begins only when a transaction is ready for execution. This approach often results in missed approvals, delayed transactions and disclosure gaps.

A strong RPT framework should operate throughout the transaction lifecycle and typically consists of four key building blocks:

1. A Clear RPT Policy

The organisation should have a Board-approved policy that:

• Identifies related parties;

• Categorises RPTs;

• Prescribes approval requirements; and

• Sets materiality thresholds.

2. Practical Operating Procedures

Policies must be supported by clear standard operating procedures that help business teams identify and escalate potential RPTs at an early stage.

3. A Transaction Monitoring Mechanism

A centralised tracker helps monitor utilisation of approved limits, identify recurring transactions and ensure that additional approvals are obtained when thresholds are approached or exceeded.

4. Defined Roles and Responsibilities

Responsibility for RPT compliance should be clearly allocated across business, finance, legal, secretarial, compliance and internal audit functions to avoid ownership gaps.

Two concepts are particularly important when determining the approval requirements for an RPT.

Ordinary Course of Business

A transaction may be considered to be in the ordinary course of business if it is routine, connected with the company's business activities and consistent with normal industry practice. The assessment is not limited to the company's principal line of business and must be considered in the context of its overall operations.

Arm's Length Basis

A transaction is on an arm's length basis when it is carried out as though the parties were unrelated and acting independently.

Importantly, this assessment extends beyond pricing. Credit terms, payment schedules, delivery conditions, guarantees, warranties and other commercial terms should also be broadly comparable to those available in transactions with unrelated parties.

For regulated entities such as NBFCs, RPT governance attracts even greater scrutiny.

Regulators expect robust processes to identify, review and monitor transactions involving promoters, group entities and connected parties. Weak controls can raise concerns regarding conflicts of interest, concentration of exposure and the overall strength of the organisation's governance framework.

Consequently, RPT governance is increasingly viewed not merely as a compliance requirement but as an indicator of the quality of an institution's risk management and compliance culture.

A robust RPT framework is a governance necessity, not merely a compliance requirement. Companies should identify related parties early, obtain the right approvals, maintain appropriate records and monitor transactions against approved limits. For listed and regulated entities, strong RPT governance demonstrates transparency, accountability and sound oversight.

Most importantly, RPT governance should be embedded into day-to-day business processes rather than treated as a periodic compliance exercise. The investment in building a strong framework is modest compared to the regulatory, financial and reputational risks of getting it wrong.

About the author: Rajendra Patil is a Partner at SNG & Partners.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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