Disclosure of Related Party Transaction

Disclosure of Related Party Transaction

Related party transactions (RPTs) sit at the intersection of four independent Indian compliance frameworks simultaneously: Section 188 of the Companies Act 2013 (approvals and board-level reporting), Regulation 23 of SEBI LODR (listed-entity obligations), Ind AS 24 / AS 18 (accounting note disclosure), and Sections 92A–92F and 92BA of the Income-tax Act 1961 (transfer pricing via Form 3CEB). For FY 2026-27 / AY 2027-28, the combined obligation means a transaction missed in one framework is almost always caught in another — and the cost of that miss ranges from Rs. 5 lakh to Rs. 25 lakh per director in civil penalties, plus potential SEBI enforcement action for listed entities.

Who Qualifies as a Related Party: Section 2(76) vs Ind AS 24

Getting the party master right before the financial year begins is the single most leverage-creating step. Under-identify related parties and your disclosure fails regulatory review. Over-identify carelessly and you trigger unnecessary approval processes. The two definitions you must reconcile are not identical.

Section 2(76) of the Companies Act, 2013

Section 2(76) lists nine categories. The ones companies most frequently undercount:

• "Relative" as defined under Section 2(77): spouse, parents, siblings, children and their spouses — a list of 15 specified relationships. Directors must submit a fresh Form MBP-1 at the first board meeting of every financial year and whenever a new directorship is accepted.
• Companies in which a director or KMP holds 2% or more of the paid-up share capital: shareholdings change with every secondary-market transaction. A director who crosses or falls below 2% mid-year changes your party master effective that date.
• A body corporate whose board, managing director, or manager is accustomed to acting in accordance with the directions of a director or KMP of the company: this "accustomed to act" test is often overlooked and extends the definition beyond formal ownership.
• Associated companies and joint ventures: the 20% significant-influence threshold for association must be re-assessed at each quarter-end, not once at year start. A stake acquired in October 2026 makes the investee a related party from that month.

Ind AS 24 (and AS 18 for Non-Ind AS Companies)

Ind AS 24 is built on a control / joint control / significant influence / key management personnel framework. Its scope exceeds Section 2(76) in two material ways:

1. Post-employment benefit plans — gratuity trusts, superannuation funds administered for the entity — are related parties under Ind AS 24 paragraph 9(b). They are not explicitly named in Section 2(76), which creates a gap that auditors are required to address under SA 550.
2. Close family members of KMP — a term Ind AS 24 defines more broadly than Section 2(77)'s "relative" list — includes any person who may be expected to influence or be influenced by the KMP in dealings with the entity, such as a domestic partner or a dependent parent not on the Section 2(77) list.

AS 18, applicable to companies not yet required to apply Ind AS (generally net worth below Rs. 250 crore under the roadmap), is narrower: it does not include a government-related-entity exemption and treats post-employment plans more simply.

Where the Definitions Diverge in Practice

A wholly owned Indian subsidiary's transactions with its ultimate foreign parent's other subsidiaries (fellow subsidiaries) are RPTs under Ind AS 24 but may not automatically trigger Section 188 if there is no direct common director or KMP link. Map both definitions against your entity structure before finalising the party master for FY 2026-27.

The Legal Framework in One View

A listed company with a foreign subsidiary is simultaneously subject to all five. Your compliance calendar for FY 2026-27 must address each one — they do not substitute for each other.

Section 188: The Approval Cascade and Penalty Exposure

Section 188 applies to every company — listed or unlisted, public or private — with a narrow exemption for transactions between a holding company and its wholly owned subsidiary where the special resolution is passed solely by the holding company.

Classifying the Transaction

Section 188(1) covers six transaction types:

1. Sale, purchase, or supply of any goods or materials
2. Selling, buying, or otherwise disposing of property of any kind
3. Leasing of property
4. Availing or rendering any services
5. Appointment to any office or place of profit in the company, its subsidiary, or associate
6. Underwriting the subscription of any securities

Each type has a monetary threshold under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014. Exceeding the threshold and the transaction being outside the ordinary course of business at arm's length activates the shareholder approval requirement.

The Threshold Test for Shareholder Approval

The shareholder approval (by ordinary resolution) is mandatory when aggregate annual transactions with a related party exceed:

• Goods or materials: lower of 10% of annual turnover or Rs. 100 crore
• Property transactions (sale/purchase): lower of 10% of net worth or Rs. 100 crore
• Services: lower of 10% of annual turnover or Rs. 50 crore
• Place of profit in company/subsidiary: monthly remuneration > Rs. 2.5 lakh
• Place of profit in associate/related entity: monthly remuneration > Rs. 1 lakh

Critical point: the ordinary-course-of-business and arm's-length exemption removes the shareholder-approval requirement — it does not remove the Form AOC-2 disclosure, the audit committee review, or the Section 184 director-interest declaration.

Form MGT-14 and Form AOC-2

After a board resolution or shareholder resolution is passed to approve an RPT:

• Form MGT-14: file on MCA V3 within 30 days of the resolution date. Late filing attracts an additional fee per the applicable fee schedule and creates a prosecution risk under Section 450.
• Form AOC-2: annexed to the Directors' Report under Rule 8(2) of the Companies (Accounts) Rules, 2014. It must separately identify transactions that were at arm's length in the ordinary course and those that were not, together with amounts, names, and the nature of the relationship.

The civil penalty for entering into or authorising an RPT in violation of Section 188 is Rs. 25 lakh per director for a listed company and Rs. 5 lakh per director for any other company under Section 188(5). The counterparty (related party) also loses the right to enforce the contract against the company.

SEBI LODR Regulation 23: The Listed-Company Layer

Regulation 23 is not a replacement for Section 188 — it runs in parallel and is more stringent in two respects: it covers transactions by subsidiaries of the listed entity, and it defines "material" at a lower absolute threshold than Section 188's goods/services thresholds.

Defining "Material" Under Regulation 23

A transaction is material if its value (or the aggregate value of all transactions of that type with the same related party during the financial year) exceeds the lower of Rs. 1,000 crore OR 10% of the annual consolidated turnover of the listed entity.

For a company with Rs. 500 crore consolidated turnover, this means any related-party transaction that crosses Rs. 50 crore in aggregate with a single counterparty is material — regardless of whether it is in the ordinary course of business.

Audit Committee as First Gatekeeper

Regulation 23(2) requires prior audit committee approval for every RPT — there is no "ordinary course" exemption from this gate. The audit committee must comprise at least two-thirds independent directors. In practice:

1. The CFO or Company Secretary prepares a quarterly RPT register listing all actual and anticipated transactions with values, terms, and relationship description.
2. The audit committee reviews arm's-length evidence (independent valuations, benchmark invoices, market rate data) and records its reasons for approval or rejection.
3. Omnibus approval is permitted under Regulation 23(3) for repetitive transactions, but only when the committee specifies: (a) the name of the related party, (b) the nature of the transactions, (c) maximum value per transaction, and (d) maximum aggregate annual value. A blanket "all related party transactions in the ordinary course" resolution without sub-limits is legally ineffective.

Half-Yearly Exchange Disclosures

Under Regulation 23(9), listed entities must submit an RPT disclosure to the stock exchanges within 21 days from the end of each half-year. For FY 2026-27:

• H1 (April–September 2026): due by 21 October 2026
• H2 (October 2026–March 2027): due by 21 April 2027

The prescribed format requires transaction-level detail for each material RPT: aggregate value, counterparty name, nature of relationship, and confirmation of audit committee and shareholder approvals. Non-submission initiates SEBI's standard listing-compliance process, which can result in fines and public disclosures of non-compliance.

Ind AS 24 and Schedule III: What the Financial Statements Must Contain

Disclosure Elements Under Ind AS 24

Paragraph 17 of Ind AS 24 requires, for each category of related party, disclosure of:

1. The amount of transactions during the period
2. Outstanding balances at year-end — terms, conditions, whether secured, and the nature of settlement consideration
3. Guarantees given or received in respect of outstanding balances
4. Provisions for doubtful debts related to outstanding balances
5. Bad or doubtful debt expense recognised during the period relating to related-party receivables
6. KMP compensation broken down into: short-term employee benefits; post-employment benefits; other long-term benefits; termination benefits; and share-based payments — each category disclosed separately

The disclosure must be made even when transactions are eliminated in consolidation — a commonly missed requirement for subsidiaries preparing standalone financial statements.

Schedule III (Division I and II) Presentation

The 2021 amendment to Schedule III introduced requirements that interact directly with RPT disclosures:

• Ageing of trade receivables and payables: companies must now present outstanding amounts bucket by bucket (less than 1 year; 1–2 years; 2–3 years; more than 3 years) with a separate column identifying related-party amounts within each bucket. If a related-party receivable overdue for more than 2 years appears in your ageing schedule, it must also be reflected in your Ind AS 24 note with a provision assessment.
• Loans and advances to directors and KMPs: separately identified with interest rate, repayment terms, and security details.
• Related-party balances in working capital: payables and receivables due to/from related parties must be presented separately from third-party balances in the balance-sheet notes.

Audit Procedures for RPTs: A Practical Sequence

Auditors operating under SA 550 (Related Parties) must build procedures independently of management's list. Here is a field-ready sequence:

1. Obtain and independently test the party master. Ask management to provide a list updated as at 1 April 2026, with quarterly updates through 31 March 2027. Cross-reference every name against MCA V3's company search for shared directors and shareholders.
2. Scan for undisclosed parties. Run a search on the cash book, bank statements, and creditor ledger for payees that share addresses, phone numbers, email domains, or GST registration prefixes with known related parties. This is the most productive procedure for catching omissions.
3. Verify approval documentation. For each sampled RPT: (a) locate the audit committee minutes — is the resolution present, specific, and signed? (b) check whether board minutes and Form MGT-14 were filed within 30 days on MCA V3. (c) for transactions above the Section 188 threshold, verify the ordinary resolution in the shareholder meeting minutes.
4. Test arm's-length pricing. For goods and materials, compare the related-party purchase price to invoices from unrelated suppliers for the same item in the same period. For intra-group loans, compare the interest rate to the company's contemporaneous external borrowing rate or MCLR-linked benchmarks. For services, seek comparable third-party quotations.
5. Send direct balance confirmations. Circulate confirmation requests to related parties for all outstanding balances at 31 March 2027. Mismatches are a productive source of previously unrecorded transactions.
6. Check Schedule III compliance. Trace every line in the Ind AS 24 note to the underlying general-ledger code and vice versa. Tick all required elements of paragraph 17. Confirm the ageing schedule flags the related-party component within each bucket.
7. Communicate significant matters. Under SA 260, any RPTs discovered during the audit that management had not included in the initial list — or that were entered into without proper approval — must be communicated to the audit committee before the audit opinion is signed.

Transfer Pricing and Form 3CEB: The Tax Dimension

RPT disclosures feed directly into transfer-pricing filings. The two primary connections for FY 2026-27:

Specified Domestic Transactions (Section 92BA)

Section 92BA brings domestic related-party transactions within the arm's-length framework if the aggregate value of all specified domestic transactions during the financial year exceeds Rs. 20 crore. Covered transactions include:

• Payments to domestic related parties where Section 40A(2)(b) could be invoked (payments to relatives, directors, and associated persons at above-market prices that the Assessing Officer can disallow as excessive)
• Transactions with units claiming tax holidays under Sections 80-IA, 80-IB, 10AA (SEZ), and similar provisions

If the Rs. 20 crore threshold is crossed, the company must obtain a transfer-pricing study, maintain prescribed documentation, and file Form 3CEB (Accountant's Certificate) for AY 2027-28, due by 31 October 2027. Non-filing or inaccurate certification carries a penalty of 2% of the value of each international transaction or specified domestic transaction under Section 271BA.

Cross-Border RPTs and the International TP Stack

Cross-border transactions between an Indian entity and its "associated enterprise" (Section 92A — triggered by 26% or more voting-power ownership or other management/capital control tests) require a three-tier documentation structure:

• Form 3CEB: Accountant's certificate covering each international transaction, benchmarking method used, and comparable uncontrolled prices
• Master File (Form 3CEAA): for groups with consolidated global revenue exceeding Rs. 500 crore — entity-level overview, global value-chain description, intangibles held, and intercompany financing
• Country-by-Country Report (Form 3CEAD): for groups with consolidated global revenue exceeding Rs. 750 crore (equivalent), filed by the Indian parent or designated constituent entity within 12 months of the close of the reporting parent's accounting year

The transaction values you populate in Form 3CEB must reconcile precisely to the values in your Ind AS 24 note. A mismatch — different aggregation logic, different exchange rates, or a transaction recorded net in the accounts but gross in the TP report — is the first question a Transfer Pricing Officer raises during a scrutiny assessment under Section 92CA.

Worked Example: Apex Textiles Ltd. — Testing Four Frameworks at Once

Facts for FY 2026-27:

• Listed on BSE; annual consolidated turnover: Rs. 500 crore; standalone net worth: Rs. 120 crore
• Related party A: Apex Holdings Pvt. Ltd. (holds 52% equity — promoter/holding company)
• Related party B: Managing Director's HUF
• Transaction 1: Purchase of polyester yarn from Apex Holdings — Rs. 60 crore for the year
• Transaction 2: Factory premises rented from MD's HUF at Rs. 30 lakh/month (Rs. 3.6 crore/year)
• Transaction 3: Unsecured inter-company loan from Apex Holdings at 9% p.a., Rs. 25 crore outstanding throughout the year

Section 188 threshold test — Transaction 1 (goods purchase): Lower of 10% × Rs. 500 crore = Rs. 50 crore, or Rs. 100 crore → applicable threshold = Rs. 50 crore. Rs. 60 crore > Rs. 50 crore → ordinary resolution required before entering the transaction. If no resolution was passed and any director authorised this purchase, that director is exposed to a Rs. 25 lakh civil penalty under Section 188(5).

SEBI LODR material RPT test — Transaction 1: Material threshold = lower of Rs. 1,000 crore or 10% × Rs. 500 crore = Rs. 50 crore. Rs. 60 crore is material → shareholder approval (ordinary resolution, with related-party shareholders excluded from voting) is mandatory before execution.

Ind AS 24 note requirement — all three transactions: The yarn purchase note must state: Rs. 60 crore transacted during FY 2026-27; balance outstanding at 31 March 2027 (say Rs. 7 crore); terms — net 45 days, unsecured; provision for doubtful debts — nil (or specify amount). The HUF rent note must state: Rs. 3.6 crore paid; advance deposit outstanding; lease terms and termination notice period. The loan note must state: Rs. 25 crore principal; 9% p.a. interest; repayable on demand; unsecured — and this must reconcile to the borrowings note and the interest-paid figure in the P&L.

Form 3CEB threshold test (domestic TP): Aggregate specified domestic transactions = Rs. 60 crore (goods) + Rs. 25 crore (loan principal) + Rs. 3.6 crore (rent) = Rs. 88.6 crore > Rs. 20 crore → transfer pricing study and Form 3CEB required for AY 2027-28 by 31 October 2027.

The failure scenario in numbers: Apex Textiles' CFO assumes the yarn purchase is "ordinary course and arm's length" and skips both the shareholder approval (SEBI) and the Section 188 ordinary resolution. The statutory auditor flags it in the long-form audit report. The company scrambles to obtain a post-facto ordinary resolution — but the penalty clock does not reset. Two directors who authorised the purchases face Rs. 25 lakh each in Section 188(5) penalties. SEBI initiates a show-cause for non-compliance with Regulation 23. Legal fees, management distraction, and a public BSE disclosure of non-compliance come on top of the civil penalty.

Common Pitfalls and How to Avoid Them

1. Stale party master carried over from the previous year. A new director appointed in June 2026 brings fresh relatives, associated companies, and HUF interests into scope from that date. A subsidiary incorporated in November 2026 is a related party from incorporation. Fix: mandate a quarterly reconciliation of Form MBP-1 submissions against the party master before each audit committee meeting.

2. Conflating the arm's-length exemption with a complete carve-out. Section 188's exemption for ordinary-course, arm's-length transactions removes only the shareholder resolution requirement. It does not eliminate the obligation for audit committee review (Regulation 23), Form AOC-2 disclosure, or Section 184 director-interest recording. Many companies skip the audit committee step on "exempt" transactions — that is itself a Regulation 23 violation.

3. Omnibus approval without granular sub-limits. SEBI's Regulation 23(3) permits omnibus approval for repetitive, frequently recurring transactions. But the approval is valid only if the committee specifies the maximum amount per transaction, the maximum aggregate annual value, and the circumstances under which the approval may be used. A resolution that says "all transactions with group companies in the ordinary course" is invalid and leaves every transaction below it without effective approval.

4. Ignoring the Schedule III 2021 ageing-schedule interaction. The amendment requires that the ageing buckets for creditors and debtors separately identify related-party balances within each bucket. A related-party payable outstanding for more than two years that is not flagged in both the ageing schedule and the Ind AS 24 note is an inconsistency auditors will qualify.

5. Values mismatching between Ind AS 24 notes and Form 3CEB. The finance team compiles the Ind AS 24 disclosure; the tax team or transfer-pricing consultant prepares Form 3CEB. If the former uses net accounting entries and the latter uses gross transaction flows, or if foreign-currency transactions are translated at different rates, the values will differ. A Transfer Pricing Officer who finds a Rs. 60 crore purchase in Ind AS 24 and a Rs. 57 crore figure in Form 3CEB will immediately open a detailed inquiry. Reconcile the two documents before finalising either.

6. Omitting FEMA compliance on cross-border RPT loans. An inter-company loan from an Indian parent to a foreign subsidiary must comply with RBI's Overseas Direct Investment master direction, and an inbound loan from a foreign parent must comply with External Commercial Borrowing norms — in addition to transfer-pricing arm's-length requirements and Section 186 restrictions. Treating it as purely a tax or accounting matter creates a multi-regulator exposure.

Key Takeaways

• Build a single party master that satisfies Section 2(76), Ind AS 24, and Section 92A simultaneously; review it quarterly, not annually, as relationships and shareholdings change during the year.
• Section 188 shareholder approval (ordinary resolution) is required when aggregate transactions with a related party exceed the lower of 10% of turnover/net worth or Rs. 100/50 crore (depending on transaction type); a director of a listed company who bypasses this approval faces a civil penalty of Rs. 25 lakh under Section 188(5).
• SEBI LODR Regulation 23 requires audit committee pre-approval for every RPT — including arm's-length ones — and shareholder approval for material RPTs (exceeding the lower of Rs. 1,000 crore or 10% of consolidated turnover); half-yearly exchange disclosures are due within 21 days of each half-year end.
• Omnibus audit committee approvals are valid only when sub-limits (per transaction and annual aggregate), counterparty name, and transaction nature are specified; blanket approvals are legally ineffective.
• Ind AS 24 paragraph 17 requires disclosure of transaction amounts, year-end outstanding balances, terms and conditions, guarantees, provisions for doubtful debts, and KMP compensation by six sub-categories — reconcile this note to the Schedule III ageing schedules introduced by the 2021 amendment.
• Form 3CEB for AY 2027-28 is required if aggregate specified domestic transactions exceed Rs. 20 crore, or if any cross-border associated-enterprise transaction exists; non-filing carries a penalty of 2% of the transaction value under Section 271BA, and the Form 3CEB values must reconcile precisely to your Ind AS 24 disclosures.
• Audit procedures must independently verify the party master against MCA V3 data, test approvals on a sample basis, confirm balances by direct external communication, and assess whether every Ind AS 24 disclosure element is present — management's representation is a starting point, never a conclusion.