Answer By law4u team
A related party transaction (RPT) refers to any business deal, arrangement, or transfer of resources, services, or obligations between a company and its related parties, as defined under the Companies Act 2013 and Indian Accounting Standards (Ind AS 24). Related parties are individuals or entities that have a close association with the company, such as directors, key managerial personnel (KMP), their relatives, holding companies, subsidiaries, or entities under common control. The main purpose of regulating related party transactions is to ensure transparency, prevent conflicts of interest, and protect the interests of minority shareholders. Examples of related party transactions include sale or purchase of goods, provision of services, leasing of property, lending or borrowing money, guarantees, or any remuneration paid to directors or relatives. For instance, if a company sells goods to a subsidiary or hires a firm owned by a director’s family member, it qualifies as an RPT. These transactions can potentially affect the company’s financial health and may be advantageous or disadvantageous to the company depending on the terms, so strict disclosure and approval norms are imposed. Under the Companies Act 2013, all RPTs must be approved by the Board of Directors, and in certain cases, by the Shareholders through a special resolution, especially when the transactions exceed specified monetary thresholds. Public companies are also required to disclose RPTs in their financial statements in the notes section, ensuring transparency for investors and regulators. The approval process ensures that interested directors do not influence decisions and that the transaction is conducted on arms-length terms, i.e., terms similar to those offered to independent third parties. In summary, a related party transaction is any financial or commercial deal between a company and its related entities or individuals, regulated to prevent conflicts of interest, ensure fair dealings, and maintain transparency in corporate governance. It requires board approval, shareholder consent in some cases, and disclosure in financial statements.
