The Related-Party Transaction Disclosure Gap That Trips Up Audit Committees

Related-party transaction failures in India almost never happen at the approval stage. They happen upstream, at identification. The audit committee can only approve, reject, or interrogate what is put in front of it. If the finance team that compiles the RPT register does not know that a promoter group entity with zero shareholding is now a related party, or that a transaction routed through an unrelated intermediary can still be caught, the committee approves an incomplete list with complete sincerity. The disclosure gap is a knowledge gap wearing a governance costume.

Which laws govern related-party transactions in India?

Two regimes apply at once: the Companies Act, 2013 for every company, and SEBI’s LODR Regulation 23 on top of it for listed entities. They define the same words differently, and the LODR net is the wider of the two.

Part of the difficulty is structural. Indian companies operate under two overlapping RPT regimes that define the same words differently, and the wider net has been getting wider every few years.

The Companies Act, 2013 works through Section 2(76), which defines related parties, Section 188, which lists the transaction types needing board (and in some cases shareholder) approval, and Section 177, which routes RPTs of listed and certain other companies through the audit committee. Board report disclosure happens through Form AOC-2, and the financial statements carry their own related-party disclosures under Ind AS 24.

SEBI's Listing Obligations and Disclosure Requirements (LODR), Regulation 23 applies on top of this for listed entities, and it is deliberately broader. Since the 2021 amendments took effect, the LODR definition of related party includes any person or entity in the promoter or promoter group regardless of shareholding, and any shareholder holding 10 percent or more of the listed entity. LODR also reaches transactions between the listed entity's subsidiaries and their related parties, and, most significantly, transactions with apparently unrelated counterparties if the purpose and effect is to benefit a related party. SEBI has also, since 2025, mandated industry standards specifying the minimum information that must be placed before the audit committee and shareholders for RPT approval, which turned the one-line agenda item into a non-compliance in itself.

The materiality test changed in December 2025. A related-party transaction is now material under LODR if, taken together with earlier transactions in the financial year, it exceeds the turnover-based threshold in Schedule XII:

Where do RPT disclosure gaps usually come from?

They come from five identification failures that happen before the committee meets: a stale register, no purpose-and-effect test, contract-by-contract aggregation, over-broad omnibus approvals and an arm’s length file with nothing in it.

1. The related-party register is built once and updated never

Most companies build their related-party master list from directors' annual disclosures in Form MBP-1 and a promoter group list from the last shareholding filing. Both are snapshots. Relatives change, directorships change, promoter group entities are incorporated mid-year, and a shareholder quietly crosses the 10 percent line. If the register is refreshed annually while relationships change monthly, every quarter's RPT list is drawn from stale data. The committee never sees the transactions that were never identified.

2. Nobody applies the "purpose and effect" test

The LODR extension to transactions that benefit a related party through an unrelated intermediary was designed precisely for structures that route value sideways: a sale to a distributor who onward-sells to a promoter entity, a loan to a vendor who lends onward. Finance teams trained to check the counterparty's name against a list will miss every one of these, because the counterparty's name is clean. This test requires judgment about substance, and judgment requires training.

3. Aggregation is done by entity, not by transaction type

Materiality under LODR is tested on transactions entered into during the financial year, taken together. Companies that track each contract separately routinely sail past the threshold in aggregate while every individual item stays comfortably below it. The same failure appears under Section 188 thresholds. By the time the aggregate is noticed, the shareholder approval that should have been prior approval can only be ratification, and related parties cannot vote to ratify their own transactions.

4. Omnibus approvals are treated as a blanket, not a framework

Omnibus approval exists for repetitive transactions, with named parties, defined nature, indicative value, and a one-year ceiling, reviewed quarterly. In practice, many omnibus resolutions are drafted so widely that they function as a standing waiver. When a regulator or a forensic auditor reads an omnibus approval that covers "all transactions with group companies in the ordinary course," the document stops being protection and becomes evidence.

5. The arm's length file is empty

"Ordinary course of business" and "arm's length" are the two phrases that exempt transactions from Section 188 approval requirements, and they are asserted far more often than they are documented. When the assertion is tested, years later, the question is simple: show us the comparable pricing, the benchmarking, the basis. A committee that approved on the strength of a bare assertion has a decision on record and no file behind it.

"In most RPT enforcement matters, the audit committee acted in good faith on the information provided. The finding against the company is that the information was incomplete, and that no one had been trained to make it complete."

Why is the RPT gap a training problem before it is a governance problem?

The people who determine whether the audit committee sees a complete picture are not on the audit committee. They are in accounts payable, procurement, treasury, legal, and the company secretary's office. Each of them needs a working instinct for three questions: is this counterparty a related party under either rulebook, does this transaction type need approval before commitment, and who do I escalate to when I am not sure.

That instinct does not come from circulating the policy. It comes from role-specific, scenario-based training: the procurement officer who is asked to onboard a vendor owned by a director's brother, the treasury executive asked to place an inter-corporate deposit with a group entity, the sales head offered a large order from a company that shares an address with a promoter firm. These are conflict-recognition skills as much as regulatory knowledge, and they sit alongside the personal conflict disclosures we covered in the eight conflict of interest questions employees are afraid to ask. The corporate register is only as good as the individual declarations feeding it.

What should a company fix this quarter to close the RPT gap?

Fix the inputs to the committee: keep the register live, train the teams that originate transactions, aggregate monthly, tighten omnibus approvals and build the arm’s length file at the time of approval.

1. Rebuild the register as a living document. Assign ownership, define the events that trigger an update (board changes, marriages, shareholding movements, new group entities), and reconcile it quarterly against MCA filings and the shareholding pattern.
2. Train the identifiers, not just the approvers. Run scenario-based sessions for the teams that originate transactions. The test of success is whether a mid-level procurement manager can spot a purpose-and-effect structure, not whether the CFO can recite Regulation 23.
3. Automate aggregation. Tag related-party counterparties in the ERP and run the year-to-date aggregate against both the LODR materiality threshold and Section 188 limits every month, not at year end.
4. Redraft omnibus approvals to survive scrutiny. Named parties, transaction nature, value limits, and a genuine quarterly review with exceptions reported.
5. Build the arm's length file at approval time. Every exemption claimed should have contemporaneous benchmarking attached to the committee papers, meeting the minimum-information standards SEBI now requires.

Our Related Party Transactions course is built for exactly this audience: finance, procurement, treasury, legal and secretarial teams who feed the audit committee, covering identification under both rulebooks, approval routes, omnibus discipline, and documentation that stands up to inquiry. Since undisclosed personal interests are where most corporate RPT failures begin, many organisations pair it with our Conflict of Interest course for the broader employee population. For role-based options, see our related party transactions training hub.

The audit committee cannot approve a transaction it never sees. Closing the RPT disclosure gap means training the hundred people who decide, mostly without realising it, what reaches the committee room. That is where the gap lives, and that is where it closes.