Related-party transactions: documenting audit committee approval.
When RPTs come up in the committee year.
1. The RPT framework, in one paragraph.
Related-party transactions in India are governed by section 188 of the Companies Act, 2013 (with rules), section 177 (audit committee approval), AS 18 / Ind AS 24 (accounting disclosures), and for listed entities by additional SEBI LODR requirements. The framework establishes (a) who is a related party, (b) which transactions need approval, (c) what level of approval applies, and (d) what disclosure is required.
2. Section 188 approvals.
Section 188 applies to the seven categories of related-party transactions listed in section 188(1): sale, purchase or supply of goods or materials; selling or otherwise disposing of or buying property; leasing of property; availing or rendering services; appointment of agent; related party's appointment to office or place of profit; underwriting of securities or derivatives.
For these transactions:
- Board approval is required.
- If the transaction exceeds the prescribed threshold (different for different categories, in terms of % of turnover or net worth), additional approval through ordinary resolution at the general meeting is required. The interested member cannot vote.
- Exception: transactions in the ordinary course of business at arm's length do not require section 188 approval (board or member). They still need audit-committee approval if above the audit-committee threshold and still need disclosure.
3. Audit committee approval and omnibus.
Section 177 requires audit committee approval for related-party transactions, separately from section 188 board / member approval. The audit-committee approval is the operational governance gate.
The audit committee can grant omnibus approval for recurring related-party transactions, subject to:
- Criteria laid down by the board, which the audit committee follows.
- Limit on aggregate value per transaction.
- Limit on aggregate value of all transactions in a year.
- Requirement to review the actual transactions on a quarterly basis.
- Omnibus approval valid for one year and to be renewed.
Omnibus approval is essential for any company with material recurring RPTs (intra-group services, intercompany supply, treasury arrangements) - without it, every transaction needs individual audit-committee approval.
4. Listed entity additional requirements.
SEBI LODR Regulation 23 imposes additional RPT requirements on listed entities:
- Material RPTs (typically those above 10% of consolidated turnover, or specified thresholds) require shareholder approval. Interested promoters cannot vote.
- All RPTs require audit committee approval; the omnibus criteria are stricter.
- Quarterly disclosure to the stock exchange of all RPTs entered into during the quarter.
- Disclosure in the corporate governance report and the audited financial statements.
- The RPT policy is required to be uploaded on the company's website and reviewed at least every three years.
The LODR thresholds and definitions have been amended multiple times; current thresholds should be confirmed at the time of compliance.
5. Disclosure templates.
RPT disclosures in the financial statements (under AS 18 / Ind AS 24) should include:
- Name of the related party and the nature of the relationship.
- Nature of the transaction (sale, purchase, services, loan, etc.).
- Volume of the transaction in the period (and the percentage of total business, where relevant).
- Amount outstanding at the year-end (and any provisions for doubtful debts).
- Material terms of the transaction.
- Any write-offs or write-backs during the period.
A template that we deploy: a standing RPT register maintained by Finance, with each transaction tagged to the relationship category and the approval reference (board resolution / audit-committee resolution / omnibus approval / member resolution). The register feeds the quarterly stock-exchange disclosure, the annual AS 18 / Ind AS 24 schedule, and the auditor's RPT testing.
6. Internal controls on RPTs.
Internal-control checkpoints that an internal audit will test:
- RPT identification: is the related-party master in the ERP up to date, with all directors, KMP, their relatives and group entities tagged?
- Transaction tagging: are all transactions with tagged parties identified as RPTs at entry, not after the fact?
- Approval workflow: is the approval gate (audit-committee, board, member) enforced in the system before the transaction is finalised?
- Pricing benchmark: where the transaction needs to be at arm's length, is the benchmark documented at the time of the transaction (not reconstructed later)?
- Periodic reconciliation: is the RPT register reconciled with the related-party master and with the actual ledger postings each quarter?
7. The auditor's questions.
The statutory auditor will ask, year after year:
- Show me the complete list of related parties for the period and the basis on which it has been compiled.
- Show me all transactions with each related party during the period, reconciled to the GL.
- Show me the audit-committee approval for each material RPT, with reference to the board resolution authorising the audit committee (where omnibus).
- For each material RPT, show me the basis on which arm's length / ordinary course was determined.
- Show me the AS 18 / Ind AS 24 disclosure schedule and reconcile it to the underlying transactions.
A company that has the register, the master and the approval audit trail in order spends a few hours on the RPT questions during audit. A company that does not spends weeks.
Frequently asked
Who counts as a related party for section 188?
The Companies Act, 2013 read with the rules defines related party broadly: directors, key managerial personnel, their relatives, firms in which a director or relative is a partner, private companies in which a director / relative is a director or member, public companies in which a director / relative is a director and holds more than 2%, holding / subsidiary / associate companies, and entities under common control. The Act's definition is the starting point; for Ind AS purposes, Ind AS 24 has a parallel (and slightly different) definition.
Is omnibus approval available for any RPT?
Generally yes for recurring transactions within the criteria established by the board. Certain categories (e.g. transactions of a value above specified limits, transactions outside the criteria) are excluded and need individual approval.
What is the threshold for material RPT requiring shareholder approval in listed companies?
Under current SEBI LODR (subject to recent amendments), an RPT is considered material if it exceeds specified thresholds (typically 10% of consolidated turnover of the listed entity, with separate thresholds for specific categories). The thresholds have been recalibrated; current applicable thresholds should be confirmed before the relevant approval.
Are intra-group services routinely RPTs?
Yes, where the group companies are related parties (which they typically are). Intra-group services need audit-committee approval (typically under omnibus) and disclosure. Arm's length pricing should be supported either by an internal cost-allocation policy or by a transfer-pricing study, depending on the size and the cross-border element.
What happens if an RPT is entered into without the required approval?
Section 188(3) makes a non-approved RPT voidable at the option of the company and the contracting party. Any loss to the company can be recovered from the directors / employees involved. The transaction also attracts disclosure requirements; concealment or misstatement carries separate penalties.
