Lesson 02 — Related-Party Transactions
Week 09 · Lesson 2 of 5 · Week 09 — Governance & Red Flags
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RelatedParty Transactions = deals between the listed company and entities connected to the promoter (family businesses, group companies, promoterowned firms)...
What are RPTs?
Related-Party Transactions = deals between the listed company and entities connected to the promoter (family businesses, group companies, promoter-owned firms).
Why they can be problematic
RPTs can be used to:
- Transfer profits OUT of the listed company to a private promoter entity
- Overpay for services from a promoter-owned firm
- Buy assets at inflated prices from the promoter group
- Provide loans to promoter entities at below-market rates
🗣️
"Company ka paisa promoter ke family business mein transfer karna — yeh RPT ka misuse hai."
What to look for
| Red flag | What it means |
|---|---|
| RPTs > 5% of revenue | Material — investigate the nature |
| Loans to promoter group | Cash leaving the company for no shareholder benefit |
| Buying assets from promoter at inflated prices | Wealth transfer from minority shareholders |
| Service fees to promoter entities | Are these at arm's length (fair market) rates? |
Green flags
- RPTs fully disclosed in notes to accounts
- All RPTs approved by independent board committee
- RPTs at arm's length pricing (verified by auditors)
Check the notes
Every annual report has a "Related Party Disclosures" note. Read it. If the amounts are large or the descriptions are vague, be careful.
Key takeaway
Not all RPTs are bad, but large, opaque RPTs are a major governance red flag.