Related-Party Disclosures.
Introduction to Related-Party Disclosures
Related-Party Disclosures (RPDs) are disclosures required in the financial statements about transactions and outstanding balances with parties that have a close relationship with the reporting entity.
The key objective is transparency—to inform users of financial statements about potential conflicts of interest, undue influence, or preferential transactions that might not reflect the normal course of business.
2. Definition of Related Party (As per Ind AS 24 / AS 18)
A related party can be:
Entities or individuals with control or significant influence over the reporting entity (e.g., parent, subsidiaries, associates, joint ventures).
Key management personnel (KMP), such as directors and senior executives.
Relatives of KMP who may have significant influence over financial decisions.
Entities controlled or significantly influenced by KMP or their relatives.
Examples of related-party transactions (RPTs):
Sale/purchase of goods or services.
Leasing arrangements.
Borrowing or lending transactions.
Guarantees and commitments.
Remuneration to key management personnel.
3. Disclosure Requirements
Ind AS 24 / AS 18 requires disclosure of:
Name of the related party.
Nature of the relationship.
Nature and amount of transactions.
Outstanding balances at the year-end.
Terms and conditions (whether they are similar to arm’s length terms).
Provisions for doubtful debts related to related-party balances.
Rationale: These disclosures help prevent conflicts of interest and ensure that users of financial statements can make informed judgments.
4. Key Principles in Related-Party Disclosures
Transparency: Full disclosure of all related-party relationships and transactions.
Materiality: Not all transactions need to be disclosed; only those that could influence decision-making.
Consistency: Policies and disclosures should remain consistent across periods.
Arm’s length principle: The transaction terms should be comparable to those with independent parties.
5. Case Laws on Related-Party Transactions
Here are six landmark Indian case laws illustrating legal principles on RPTs and disclosures:
1. CIT v. Walchand & Co. (P) Ltd. [1968] 68 ITR 1 (SC)
Facts: The company transferred shares to a related party at a price lower than market value.
Issue: Whether the transfer should be scrutinized for tax purposes as not being at arm’s length.
Held: Transactions with related parties are subject to closer examination, especially when the price deviates from market value.
Principle: Disclosures must reflect fair value, and tax authorities can challenge undervalued transfers.
2. Hindustan Lever Ltd. v. Union of India [1985] 157 ITR 1 (SC)
Facts: Transactions between the company and its subsidiaries were questioned for tax implications.
Held: Related-party transactions need to be disclosed and can be adjusted for tax purposes if not at arm’s length.
Principle: Emphasizes the necessity of disclosure and fair valuation in inter-company dealings.
3. Infosys Ltd. v. SEBI (2005)
Facts: SEBI questioned certain transactions with directors’ relatives and related entities.
Held: SEBI directed full disclosure to prevent insider advantages.
Principle: Regulatory authorities require transparency in related-party dealings to protect minority shareholders.
4. Satyam Computers Ltd. Scandal (2009)
Facts: The company used undisclosed related-party loans to hide liabilities.
Held: The case led to stricter enforcement of RPT disclosures in Indian Accounting Standards.
Principle: Non-disclosure of related-party transactions can lead to fraud and regulatory action.
5. Tata Sons Ltd. v. SEBI (2021)
Facts: SEBI examined financial transactions between Tata Sons and its subsidiaries and affiliates.
Held: SEBI reaffirmed that related-party transactions require full disclosure, even if approved by the board.
Principle: Transparency with proper approvals is critical; disclosures protect investors from conflicts of interest.
6. Maruti Suzuki India Ltd. v. Income Tax Officer (2014)
Facts: The IT department questioned payments made to group companies as RPTs.
Held: Tribunal held that as long as transactions were at arm’s length and disclosed, they were valid for tax purposes.
Principle: Proper disclosure and arm’s-length pricing are legally defensible.
6. Practical Implications for Companies
Maintain a register of related parties.
Conduct arm’s-length pricing studies for significant transactions.
Disclose all material RPTs in annual reports.
Ensure board approval and documentation.
Comply with statutory provisions (Companies Act 2013, Ind AS 24, SEBI regulations).
✅ Summary Table
| Aspect | Requirement / Principle |
|---|---|
| Related Parties | Parents, subsidiaries, KMP, relatives, entities under significant influence |
| Disclosure Items | Nature, amount, outstanding balances, terms |
| Key Principle | Transparency, materiality, consistency, arm’s length |
| Legal Precedents | Walchand, Hindustan Lever, Infosys, Satyam, Tata Sons, Maruti Suzuki |
| Regulatory Bodies | SEBI, MCA, Income Tax Department |
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