What is a related-party transaction (RPT) and why it matters

What counts as a related party

A related party is anyone with a connection to the company close enough to create a conflict of interest. That includes the promoter and the promoter group, the directors and key managerial personnel and their relatives, and other companies in the same group such as subsidiaries, associates, and joint ventures. A transaction with any of these is a related-party transaction. Common examples are a company buying raw material from a promoter-owned supplier, paying a royalty or brand fee to the parent, lending to or borrowing from a group company, or selling a division to an associate.

RPTs are not illegal and are frequently a normal part of how a group operates. A subsidiary buying from its parent at a fair price can be perfectly efficient. The concern is not that RPTs happen, but that the company is, in effect, on both sides of the deal, so the terms might favour the insider at the expense of the public shareholders. That conflict is why the law wraps RPTs in disclosure and approval requirements rather than banning them.

The materiality line and the shareholder vote

Every RPT must be approved by the company's audit committee, which is meant to check that the deal is at arm's length and in the company's interest. Beyond that, the rules draw a materiality line. A transaction is treated as material if it exceeds 1,000 crore rupees or 10% of the company's consolidated annual turnover, whichever is lower. A material RPT, and any material modification to it, needs the prior approval of shareholders through a resolution, on top of the audit-committee and board approvals.

The decisive safeguard sits in that shareholder vote. When shareholders vote on a material RPT, the related party (and parties related to it) cannot vote on the resolution. This means the promoter, who is usually the largest shareholder and often the counterparty, is excluded, so the resolution effectively requires the consent of the public and independent shareholders. It is one of the strongest minority-protection mechanisms in Indian corporate law, because it stops a controlling shareholder from approving its own deal with its own votes.

How to read an RPT disclosure as an investor

When an RPT appears in a disclosure or a results filing, the questions to ask are about fairness and scale. Is the transaction at arm's length and on normal commercial terms, or does it look like value is being routed to the promoter? Is it a routine operational dealing within the group, or a large one-off such as selling a prized asset to a related entity? A pattern of large RPTs, especially royalty payments, loans to group companies, or asset transfers that always seem to favour the insider, is a recognised governance red flag.

RPTs are disclosed in the financial statements and in periodic filings, and material ones come with the detail needed to judge them. The mechanism is not there to make you suspicious of every group transaction, most of which are benign, but to let you scrutinise the ones that move real value between the company and its insiders. When you see a material RPT being put to a shareholder vote, remember that your vote, and the votes of other public shareholders, are exactly what decides it, because the related party is shut out of that count.

Why RPTs are a governance signal, not just a compliance item

The way a company handles its related-party transactions is one of the clearest windows into the quality of its governance. A well-governed company keeps RPTs at arm's length, discloses them fully, routes the material ones through independent scrutiny, and does not lean on them to quietly enrich the promoter. A poorly governed one uses RPTs as a pipe: inflated royalty or brand fees to the parent, loans and advances to group entities that may never come back, or the sale of a profitable business to a promoter-linked company at a soft price. The transactions may each be legal, yet together they leak value away from the public shareholders who own a slice of the listed entity.

This is why seasoned investors read the related-party section of the annual report as carefully as the profit figure. It tells you whether the controlling shareholder treats the listed company as a shared asset or as a personal one. A company with minimal, clearly commercial RPTs earns trust. A company where a rising share of profit flows out through royalties, where receivables from group companies keep growing, or where assets move to insiders, deserves a discount no matter how good the headline numbers look. The disclosure rules and the related-party voting bar exist precisely because this is one of the main ways minority shareholders can be shortchanged, and they give you both the information and the vote to push back.

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Common questions on related-party transaction.

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