Related party transactions are extremely common in Indian companies, especially in closely-held businesses, family-run companies, and companies where directors hold multiple roles in group entities. A related party transaction simply means a transaction between the company and someone who is connected to the company in a personal or financial way. This could be a director, a relative of a director, a firm in which a director has an interest, an associate company, a subsidiary, or another entity where the director is involved. These transactions are not illegal at all—companies are allowed to do business with such parties—but they must be transparent, fair, properly recorded, and approved as required under law. When companies fail to disclose such transactions, hide the commercial terms, or bypass board approval, it can lead to allegations of siphoning of funds, misuse of power, and violation of shareholder rights.
In practice, many small and medium companies treat related party transactions casually. For example, the director may use a vendor owned by his relative, or the company may take a loan from a director’s family member, or the business may shift work to a group company without recording it properly. What looks harmless can create serious issues later. If the company is sued, investigated, or undergoes valuation, hidden related party dealings raise doubts about integrity. Proper compliance builds trust with investors, shareholders, lenders, and auditors.
Under the Companies Act, 2013, related party transactions require prior Board approval, and in many cases, approval of shareholders through a special resolution. Transactions must be at arm’s length and in the ordinary course of business. Arm’s length means that the price and terms must be similar to what the company would offer to an unrelated third party. Companies must disclose the details of these transactions in their financial statements and maintain records so that any auditor or regulator can check them later.
When companies follow proper compliance, related party transactions become smooth and risk-free. The company avoids penalties from the Ministry of Corporate Affairs, avoids disputes among shareholders, and prevents any suspicion of wrongdoing. The safest approach is to maintain a written policy, ensure all transactions are documented, conduct periodic reviews, and take approvals in advance. Good governance is not only a legal requirement—it also protects the long-term interests of the business.