🎯 Board Insights – Episode 3 - Related Party Transactions: The Hidden Governance Risk

🧩 What Are RPTs and Why Do They Matter?

Related Party Transactions (RPTs) are dealings between a company and entities or individuals with pre-existing relationships—such as promoters, directors, subsidiaries, or key management personnel.

RPTs are not inherently bad. In fact, many are operationally necessary—such as use of group services, technology sharing, or inter-company funding. However, they represent one of the most sensitive and scrutinized areas in governance because of the inherent potential for conflict of interest, misuse of influence, and lack of transparency.

🔍 Examples of RPTs:

·         Sale or purchase of goods/services

·         Leasing of property

·         Royalty and licensing arrangements

·         Loans, guarantees, or financial assistance

·         Transfers of resources or obligations

·         Availing or rendering services between group companies

⚠️ Key Risks Associated with RPTs

1.      Conflict of Interest→ Same individuals may be on both sides of the transaction.

2.      Erosion of Shareholder Value→ Unfair pricing or non-arm’s length terms can harm minority shareholders.

3.      Reputation & Regulatory Scrutiny→ SEBI, auditors, tax authorities, and investor communities actively monitor RPTs.

4.      Opacity in Complex Structures→ Poorly disclosed or layered transactions can erode stakeholder trust.

🎯 How Can Independent Directors Add Value?

Independent Directors (IDs) play a crucial role in safeguarding governance around RPTs:

·         ✅ Review the Rationale: Why this transaction? Are there alternatives?

·         ✅ Seek Arm’s Length Validation: Ask for third-party benchmarking or expert valuation.

·         ✅ Demand Clear Disclosures: Avoid legalese—insist on transparency.

·         ✅ Strengthen Audit Oversight: Actively lead or participate in RPT reviews.

·         ✅ Protect Minority Shareholders: Ensure fairness, objectivity, and accountability.

·         ✅ Adopt Industry Best Practices: Bring global perspectives and governance insights to the table.

🌟 Best Practices in RPT Governance

Adopted by Leading Boards & Companies

📌 1. Dedicated RPT Policy with Board Ownership

Example: InfosysInfosys maintains a robust, annually reviewed RPT policy covering thresholds, definitions, and arm’s length criteria.🟢 Best Practice: Treat RPT policy as a governance framework, not just a compliance file.

📌 2. Pre-Clearance System via Workflow Tools

Example: Tata GroupInternal tools flag and route RPTs for review before execution.🟢 Best Practice: Use tech-enabled controls to flag potential risks early.

📌 3. Independent Benchmarking of Transactions

Example: HULUses external studies to justify fairness in royalty/service agreements.🟢 Best Practice: Get third-party valuation to reinforce arm’s length pricing.

📌 4. Quarterly RPT Register Reviews by Board

Example: Mahindra GroupEntire board—not just Audit Committee—reviews RPTs quarterly.🟢 Best Practice: Foster full board-level transparency.

📌 5. Visual Dashboards for RPT Monitoring

Example: Unilever & NestléUse dashboards to show exposure, trends, and red flags.🟢 Best Practice: Empower directors with real-time, visual data.

📌 6. Plain Language Disclosures

Example: Asian PaintsExplains pricing logic and business context in annual reports.🟢 Best Practice: Communicate with clarity, not complexity.

📌 7. Active ID Involvement in RPT Dialogues

Example: Marico & Tech MahindraIDs engage in strategic discussions—well before approval stage.🟢 Best Practice: Encourage constructive board-management engagement.

📌 8. Annual Training on RPT Risks

Example: Global BoardsTraining includes regulatory updates, complex structures, audit expectations.🟢 Best Practice: Keep the board informed, equipped, and proactive.

🧭 Closing Reflection

“Related Party Transactions are not just about regulation—they’re about boardroom ethics and stakeholder trust.”Boards that lead in this area don’t just approve transactions—they challenge, scrutinize, and elevate the standards of fairness and transparency.

💬 Let’s Discuss

How is your board dealing with RPT challenges?Are there governance practices you’ve adopted that others can learn from?

Share your insights. Let’s build a better governance culture—together.