Level 6 · Annual Report Analysis
Related-Party Transactions
Money moving between the company and the people who control it.
In this lesson
What you'll be able to do
- Define a related party
- Locate the RPT disclosure
- Distinguish routine from concerning transactions
- Assess RPT scale
Think about it
A company buys all its raw material from a firm owned by the promoter's family. Is that a problem?
Story
Let's picture it
A school buys every notebook from a stationery shop owned by the principal's brother, at a price nobody else was allowed to quote. The notebooks might be perfectly fine and fairly priced, but nobody checked, and the person who benefits is the person who decided.
Visual
Assessing related-party transactions
Find the RPT note
A mandatory list of all transactions with related parties
Identify the parties
Promoters, directors, key personnel, subsidiaries and relatives
Size the transactions
Express as a percentage of revenue, costs or net worth
Judge the pattern
Routine and disclosed, or large, unusual and growing?
Plain English
The simple explanation
Related parties include promoters, directors, key managerial personnel, their relatives, and entities they control. All transactions with them must be disclosed in the notes.
Related-party transactions are not inherently wrong. Group companies trade with each other constantly for genuine operational reasons, and the law permits it with disclosure and approval.
The concerns are scale, pricing and pattern: transactions large relative to the business, loans or advances to promoter entities, or arrangements growing yearly without clear commercial logic.
Real world
Indian governance framework
SEBI requires material related-party transactions at listed companies to be approved by shareholders, with related parties barred from voting. The rule exists because this is a recognised channel through which minority shareholders can be disadvantaged.
Watch out
Common mistakes
- Assuming all RPTs are wrongdoing.
- Ignoring loans and advances to promoter entities.
- Not sizing transactions relative to the business.
Did you know?
Related-party disclosures cover subsidiaries, associates and joint ventures too, which is why the note is often long even at well-governed companies.
Your turn
Mini challenge
Find the RPT note. Express the largest transaction as a percentage of revenue.
Quick quiz
1 / 5
Wrap up
Summary
Related-party transactions are legal and often routine. Read the note, size them against revenue and net worth, and watch loans flowing to promoter-controlled entities.
- Related parties = those with control or influence
- Disclosure is mandatory
- Judge scale, pricing and pattern
- Loans to promoter entities deserve scrutiny
Revise