Definition
Related-Party Transactions
Related-party transactions (RPTs) are deals between a company and parties connected to it, such as promoters, directors or group entities.
RPTs — sales, purchases, loans, guarantees or service contracts with related parties — can be legitimate but carry the risk of diverting value from minority shareholders to insiders. The Companies Act and SEBI LODR require RPTs to be approved by the audit committee, and material RPTs to be approved by shareholders (with related parties abstaining) and disclosed.
SEBI has progressively tightened the definition of related parties and the materiality thresholds. Scrutiny of RPTs is a central governance safeguard, and proxy advisers often flag questionable deals at the AGM.
Related terms
- Audit CommitteeThe audit committee is a board sub-committee that oversees financial reporting, internal controls, audits and related-party transactions.
- Proxy Advisory FirmA proxy advisory firm analyses resolutions at shareholder meetings and recommends how institutional investors should vote.
- Promoter vs Professional ManagementThis contrasts companies controlled by founding promoters with those run by professional managers and dispersed ownership.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.