Related Party Transactions Under Companies Act 2013: Approvals, Documentation, and Audit-Proof Pricing Notes

Related Party Transactions Under Companies Act 2013: Approvals, Documentation, and Audit-Proof Pricing Notes

Why RPTs become a red-flag (even when they’re routine)

Most Indian companies—especially growing groups, founder-led businesses, and India subsidiaries—use related party arrangements for legitimate reasons:

  • Shared services (finance, HR, IT)
  • Brand/IP licensing
  • Rent/lease of premises
  • Inter-company loans or guarantees
  • Purchase/sale of goods between group entities

The risk is not the existence of RPTs. The risk is weak approvals, missing documentation, and unclear pricing rationale. These gaps can trigger:

  • Statutory audit qualifications or CARO observations
  • Investor diligence queries and delayed term sheets
  • ROC scrutiny during inspections
  • Governance concerns for independent directors

If your RPT process is “email-based” and approvals are taken after the fact, you’re exposed.

What qualifies as a Related Party (quick clarity)

Under Section 2(76) of the Companies Act, 2013, related parties typically include:

  • Directors and their relatives
  • Key managerial personnel (KMP) and their relatives
  • Firms/companies where directors/KMP or their relatives have significant interest
  • Holding, subsidiary, associate companies
  • Fellow subsidiaries
  • Entities where the company’s director is also a director (subject to conditions)

Practical tip: Maintain a Related Party Master List updated quarterly (or whenever a director/KMP changes). Most failures start here.

Which transactions are covered under Section 188

Section 188 covers specified transactions with related parties, including:

  • Sale, purchase, or supply of goods/materials
  • Selling or otherwise disposing of property
  • Leasing of property
  • Availing or rendering of services
  • Appointment of agent for purchase/sale of goods, materials, services, or property
  • Appointment to any office/place of profit
  • Underwriting of securities/derivatives

Even if a transaction is “small,” it may still require Board approval. Materiality thresholds drive shareholder approval.

Approval framework: Board vs Shareholders (how to think about it)

1) Board approval (baseline)

For most RPTs under Section 188, you should assume Board approval is required unless clearly exempt.

Board agenda should include:

  • Name of related party and relationship
  • Nature, duration, and particulars of contract/arrangement
  • Material terms (pricing, payment terms, credit period)
  • Any advance paid/received
  • Manner of determining price and other commercial terms
  • Whether the transaction is at arm’s length and in ordinary course of business

2) Shareholder approval (when thresholds/materiality apply)

Certain RPTs crossing prescribed thresholds require shareholder approval (Ordinary Resolution), and related parties may be restricted from voting in certain cases.

Practical approach:

  • Build an internal “RPT Threshold Tracker” (annualized value per counterparty + per transaction type)
  • If you’re close to thresholds, plan approvals early—don’t wait for year-end

3) Audit Committee approval (for applicable companies)

If your company is required to have an Audit Committee, RPTs typically need Audit Committee review/approval.

Best practice:

  • Route all RPT proposals through a standardized note to the Audit Committee
  • Maintain minutes/extracts as part of the RPT file

Arm’s length + ordinary course: the two phrases you must prove

Many teams write “arm’s length” in minutes without evidence. Auditors and investors increasingly ask: Show me how you concluded that.

What “ordinary course of business” should look like in documentation

  • The transaction aligns with the company’s objects and normal operations
  • Similar transactions occur with non-related parties (where possible)
  • The commercial rationale is clear (capacity, expertise, cost, speed)

What “arm’s length” should look like in documentation

  • Pricing is comparable to market/third-party quotes, or
  • Pricing is supported by a cost-plus or allocation methodology, or
  • Pricing is benchmarked using defensible comparables

If you cannot benchmark directly, document the reasonableness:

  • Cost build-up
  • Margin rationale
  • Service level commitments
  • Termination clauses

The “Audit-Proof RPT File” (what to keep, in what order)

Create one folder per related party counterparty, with subfolders per financial year.

Mandatory core documents

  • Related Party declaration(s) from directors/KMP
  • Register of contracts/arrangements (Section 189) extract
  • Draft agreement/contract and executed copy
  • Board/Audit Committee minutes approving the transaction
  • Shareholder resolution (if applicable)
  • Disclosure in financial statements (Ind AS/AS) support

Commercial and pricing support (the part most companies miss)

  • Pricing note (see template below)
  • Third-party quotations / comparable invoices (if available)
  • Cost sheet / allocation workings
  • Emails/notes showing negotiation and commercial rationale
  • Evidence of delivery (service reports, timesheets, milestones)

Operational proof (to avoid “paper-only” allegations)

  • Invoices raised and payment proofs
  • TDS/GST compliance documents
  • Reconciliation of inter-company balances
  • Confirmation of balances at year-end

Pricing Note Template (copy-paste structure)

Use this as a standard internal memo attached to every RPT approval.

1) Transaction summary

  • Counterparty:
  • Relationship:
  • Transaction type (Section 188 category):
  • Period:
  • Estimated annual value:

2) Business rationale

  • Why is this required?
  • Why this related party (capability, speed, control, confidentiality)?
  • What happens if we don’t do it?

3) Scope and deliverables

  • Services/goods description
  • SLAs / KPIs (turnaround time, uptime, accuracy)
  • Reporting cadence

4) Pricing methodology

Choose one and document clearly:

  1. Comparable uncontrolled price (third-party quotes/invoices)
  2. Cost-plus (define cost base + markup)
  3. Allocation key (headcount, usage, revenue, time spent)
  4. Fixed fee (basis of arriving at fee)

5) Reasonableness / arm’s length support

  • Comparable range and where we fall
  • Margin rationale
  • Credit terms comparison
  • Any special terms and why they’re justified

6) Compliance check

  • Board approval required? (Y/N)
  • Audit Committee approval required? (Y/N)
  • Shareholder approval required? (Y/N)
  • Interested director abstained? (Y/N)

7) Risk controls

  • Cap on annual value
  • Quarterly review of pricing and performance
  • Termination clause
  • Documentation owner and storage location

Common RPT mistakes that create penalties and diligence delays

  • Taking approvals after invoices are raised
  • No annualized threshold tracking (accidentally crossing limits)
  • Vague agreements (“management services” with no deliverables)
  • Pricing notes without comparables/cost support
  • Not updating related party list after director/KMP changes
  • Missing disclosure support for financial statements
  • Inter-company balances not reconciled—leading to audit adjustments

A simple monthly RPT compliance routine (15 minutes)

  • Update RPT tracker with invoices booked during the month
  • Check annualized totals vs thresholds
  • Confirm approvals exist for any new arrangement
  • Reconcile inter-company balances
  • File invoices + delivery proof in the counterparty folder

Best Takeaway

Treat every RPT like you’ll need to defend it to three audiences: auditors, investors, and regulators. If you can show (1) timely approvals, (2) clear scope, and (3) a pricing note with evidence, RPTs become a governance strength—not a fundraising blocker.

If you want, we can also map your recurring group transactions into a standardized RPT register + approval calendar so nothing slips at year-end.