Related Party Transactions explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Every related party transaction of the last three years will appear in the prospectus. The only question is whether it can be explained when it does.
Not a disclosure item
The session treated related party transactions as a discrete and recurring readiness issue rather than a mere disclosure item — which is the right framing, since disclosure is guaranteed and the work is in making what is disclosed defensible.
The five steps
| Step | Action |
|---|---|
| (a) Identify | Related parties and related party transactions over the preceding three years, common examples being management fees, director remuneration, brand royalties and inter-company loans |
| (b) Eliminate | Transactions that serve no legitimate business purpose |
| (c) Reduce | Exposure — for instance by substituting promoter loans with conventional bank debt |
| (d) Substantiate | The pricing of transactions that are retained, through benchmarking to demonstrate that they are conducted at arm's length price |
| (e) Document | Through written contracts and service agreements |
The example given for elimination is specific and worth understanding: the sale and purchase of goods between group entities controlled by the same promoters that serves only to shift where profit is recorded rather than any genuine commercial purpose.
Such arrangements are common in privately held groups and often entirely benign in origin — profit is placed where a tax position, a bank covenant or a family arrangement requires it. Nothing is concealed from anyone who matters, because the same people own both sides.
In a prospectus it reads differently. A public investor buying the listing entity sees revenue and margin that depend on transactions with entities the promoter still controls, on terms the promoter set. The question is not whether the profit was real but whether it will continue on the same terms after listing.
That is why the step is eliminate rather than disclose. A transaction with no commercial purpose cannot be defended by benchmarking, because there is nothing to benchmark it against.
Steps (c) and (d) then handle the transactions that do have a purpose. A promoter loan is legitimate but avoidable — substitute conventional bank debt. Rent to a family entity is legitimate and unavoidable — benchmark it, as with an arm's length rent for premises owned by a family entity, or a benchmarked brand or trademark licence fee.
Why the timing is unforgiving
The session stressed that this exercise should be undertaken as early as possible rather than in the year immediately preceding filing, since the objective is for each of the three years of restated financial statements to independently withstand scrutiny, which is considerably harder to achieve where the clean-up itself only began shortly before the relevant financial year closes.
The arithmetic is simple and brutal. Three years of restated accounts are required. A clean-up beginning today produces one clean year at the next year end, two the year after, three the year after that — which is precisely the thirty-six month runway the session describes.
A clean-up begun a year before filing produces one clean year and two that show the transactions being unwound.
The disclosure that follows regardless
All related party transactions during the preceding three years shall in any event be disclosed in the draft red herring prospectus.
That is the fact that makes the five steps necessary rather than optional. Nothing is hidden by the process; the process determines only what the disclosure will show.
Working through the framework
- Build the three-year list of related parties and transactions.
- Test each for legitimate business purpose — eliminate those that fail.
- For those that pass, ask whether the exposure can be reduced by substitution.
- For what remains, benchmark the pricing.
- Put each on a written contract or service agreement.
- Repeat the test annually, so all three restated years stand independently.
Common mistakes
- Treating related party transactions as a disclosure exercise.
- Benchmarking a transaction that has no commercial purpose.
- Beginning the clean-up within the three-year restatement window.
- Retaining promoter loans where bank debt is available.