Related Party Transactions (RPTs) under Section 188 of the Companies Act, 2013, are among the most scrutinised areas in statutory audit, internal audit, and regulatory review. Minority shareholders, institutional investors, and ROC filings all depend on accurate RPT identification, approval, and disclosure.
Directors with indirect interests through group entities, promoter-owned service arrangements, and lease transactions with related parties frequently fail the substance test — even when formal disclosures exist.
This article outlines the approval workflow, audit committee responsibilities, and Schedule V disclosure obligations companies must satisfy — and the pitfalls auditors commonly raise.
I. Identifying related parties and transactions
Related parties include directors, KMPs, their relatives, and entities in which they hold significant influence or control. Transactions include sale, purchase, leasing, services, and guarantees — not only obvious cash transfers.
- Maintain a live related-party register updated on board changes
- Map group entities and common directors quarterly
- Classify transactions by nature before year-end rush
II. Approval and audit committee workflow
Section 188 prescribes approval requirements based on transaction thresholds and nature. Audit committees of listed and specified companies must review RPTs under SEBI LODR and Companies Act rules. Board resolutions must record interested director abstentions.
III. Disclosure in financial statements
Schedule V to the Companies Act requires detailed RPT disclosures in the Board's Report and financial statement notes. Inconsistent disclosures between notes, related-party registers, and tax returns trigger audit qualifications and investor concerns.
Key takeaways
- RPT compliance begins with accurate related-party identification — not year-end checklist exercises.
- Audit committee review and interested-director abstentions must be documented.
- Arm's length evidence should support all material related-party charges.
- Schedule V disclosures must reconcile with registers and tax filings.
Conclusion
Strong RPT governance protects minority shareholders and reduces regulatory exposure. Companies that institutionalise quarterly RPT reviews avoid the emergency clean-ups that precede IPO and lender diligence.
Important disclaimer
References to Sections and Rules are indicative. Confirm current thresholds and listing regulations for your company category.