How to Spot Related-Party Transactions That Quietly Hurt Shareholders

A company may report rising revenue and profits while some of its transactions benefit businesses connected to its promoters or directors. These dealings are called related-party transactions (RPTs). They can be part of normal business, but unclear terms, unusual pricing or repeated transfers of value can raise concerns for outside shareholders.

Knowing how to spot these transactions helps investors read annual reports more carefully and understand where a company's money is going.

To spot related-party transactions that may hurt shareholders, review the annual report's related-party disclosures, check who the other parties are, compare transaction values with the company's size, and look for unusual pricing, unpaid balances, repeated advances or weak explanations. A transaction alone does not prove wrongdoing; the terms and context matter.

A related-party transaction refers to any transaction that occurs between the organization and an individual or entity having a relationship with the organization according to the appropriate accounting standards. It could be a transaction made with the parent company, subsidiary, associated company, or key management personnel or even their immediate family members.

Examples include a company renting property from a promoter-linked business, buying goods from a group company, lending money to a related entity, or providing a guarantee for its borrowing.

Such transactions can be legitimate. The concern is whether the terms are fair to the company and its shareholders.

1. Large payments to promoter-linked companies: A company may buy goods, services, or property from businesses connected to its promoters or directors.

What to check: Identify the parties and amounts in the annual report. Compare transaction values with revenue, expenses or similar dealings where possible.

2. Unusual pricing or terms: A company may pay a related party more than an independent supplier or offer favorable terms to a connected business.

What to check: It is important to compare prices and contract terms wherever possible. However, it is not misconduct in itself if there are no details.

3. Loans, advances or guarantees: Such transactions may subject the organization to payment risks, particularly when the related party faces financial difficulties.

What to check: Check the amount owed, interest rate, repayment terms, and guarantees. Focus on the growing amount that remains unpaid.

4. Transactions growing without explanation: Related-party dealings may rise faster than the company's business, potentially increasing its dependence on connected entities.

What to check: Compare the amounts of transactions over the years to either sales, purchases, or asset values, whichever is applicable to that particular transaction.

5. Unclear disclosures: Unclear explanations and insufficient details on the commercial rationale and amount of balances outstanding may complicate transaction analysis.

What to check: Review the related party notes, auditor’s report, and corporate governance disclosures. Identify any unresolved issues that have been disclosed.

The company's latest annual report is the best place to start. Look for terms such as "related-party transactions", "related-party disclosures" or "Ind AS 24". These sections identify related parties and disclose transaction amounts, outstanding balances and commitments.

For listed firms, consider stock exchange disclosures as well as shareholder communications about transactions that may require approval.

SEBI's Listing Obligations and Disclosure Requirements (LODR) framework sets out relevant approval and disclosure requirements.

These requirements have been updated, so verify the applicable rules and dates before relying on a particular threshold.

A transaction with a related party can affect the company's cash, assets, expenses or future obligations. If terms are unfavorable, the company may receive less value or take on risks that do not benefit all shareholders equally.

Still, the existence of a related-party transaction does not establish that shareholders have been harmed. The transaction's purpose, terms, approvals, disclosures and financial impact all need to be considered together.

Related-party transactions deserve attention because the connection between the parties can create a risk of conflicts of interest. Check the amounts, terms, outstanding balances and explanations across annual reports. Look for patterns rather than drawing conclusions from one transaction alone.

Ans. Absolutely not. Many are part of normal business operations. It boils down to fairness of the deal, its proper authorization and disclosure, if needed.

Ans. First look at the related party note of the annual report of the firm.  For listed companies, review relevant stock-exchange filings and shareholder notices as well.

Ans. Loans, advances and guarantees can expose a company to repayment risk. The amount, terms, outstanding balance and repayment history help explain the level of exposure.

Ans. No. Size alone does not establish misconduct. Its business purpose, pricing, terms, approvals and effect on the company need to be assessed.

Ans. Ind AS 24, Related Party Disclosures, sets out requirements for identifying related-party relationships and disclosing transactions, outstanding balances and commitments where applicable.

Sources

• SEBI, Industry standards on information for related-party transaction approvals, June 2025.

• NSE, Listing compliance and related-party transaction disclosures.