The purpose of this policy is to make related party transactions visible before they happen, not to describe them afterwards. The failure point is almost always identification — a transaction nobody flagged as related is one nobody approved.
Related Party Transactions Policy
[COMPANY NAME]
The purpose of this policy is to make related party transactions visible before they happen, not to describe them afterwards. The failure point is almost always identification — a transaction nobody flagged as related is one nobody approved.
| Item | Detail |
|---|---|
| Policy owner | [Company Secretary / Chief Financial Officer] |
| Approved by | The Board of Directors on [DATE] [, on the recommendation of the Audit Committee] |
| Effective from | [DATE] |
| Version | [NUMBER] |
| Review frequency | Annually, and on any change in law or in the Company’s circumstances |
| Next review due | [DATE] |
| Published at | [WEBSITE LINK / Available at the registered office] |
1. Purpose
1.1This policy sets out how the Company identifies, evaluates, approves, records, monitors and discloses transactions with related parties, so that such transactions are entered into on terms that are fair to the Company and are properly authorised and recorded.
1.2The policy is adopted in accordance with the requirements of the Companies Act, 2013 and the rules made under it, [and the applicable listing requirements,] and applies in addition to, and not in substitution for, those requirements. Where this policy is more restrictive than the law, this policy applies.
1.3The policy applies to the Company and to each of its subsidiaries, and binds every director, key managerial person, officer and employee of the Company.
2. Definitions
2.1"Related party" has the meaning given in the Companies Act, 2013 and includes, in relation to the Company: a director or key managerial person of the Company, and any relative of either; a firm in which a director, manager or their relative is a partner; a private company in which a director or manager or their relative is a director or member; a public company in which a director or manager is a director and holds, with relatives, more than the prescribed proportion of the paid-up capital; a body corporate whose board, managing director or manager is accustomed to act in accordance with the advice or directions of a director or manager of the Company; a holding, subsidiary or associate company of the Company, and a subsidiary of the Company’s holding company; [and any person or entity belonging to the promoter or promoter group holding the prescribed proportion of shares].
2.2"Relative" has the meaning given in the Companies Act, 2013 and the rules made under it, and includes members of a Hindu undivided family, a spouse, and the categories of family member prescribed.
2.3"Related party transaction" means any transaction, contract or arrangement between the Company and a related party, whether or not for consideration, and includes the categories set out in Clause 3 and any transaction that is required by law or by the applicable accounting standard to be treated as a related party transaction.
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These notes accompany the template and explain the drafting choices, the compliance points and the mistakes most often made with this document. They appear as a final page in the Word file, intended to be deleted before the document is executed.
The single most common failure is adopting a well-drafted policy in which every monetary threshold is left as a blank. Nobody can comply with it, so nobody tries. Set the numbers to the Company’s actual scale before adopting, and revisit them as the Company grows.
Companies rarely fail to approve a related party transaction they know about. They fail to notice that a transaction involves a related party at all — because a director’s spouse is a partner in the supplier firm, or because a private company in which a director is a member has been onboarded through procurement. Clauses 4.2 and 4.3 are the operative controls: a maintained database, and a screening step before onboarding. Without them the rest of the policy is theatre.
Relatives, firms in which a relative is a partner, private companies in which a director is merely a member, and bodies corporate accustomed to act on a director’s directions are all caught. Collect the annual disclosure of interest properly, in the prescribed form, and treat it as the foundation of the database rather than a filing formality.
Thresholds are tested on the aggregate value of transactions of the same nature with the same related party in a financial year. A series of individually small purchases can cross the threshold with nobody noticing, because each was approved on its own. Clause 5.4 and the aggregate column in Annexure B exist to catch this, and the quarterly statement is where it becomes visible.
Clause 9.1(d) prohibits splitting a transaction to stay below a threshold. This happens more often through inattention than design — a single annual engagement issued as four quarterly purchase orders. Ask whether the transaction, viewed as a whole, would have needed a different approval.
Clause 6.2 says plainly that an unsupported assertion does not satisfy the policy. Two quotations and a written comparison is a low bar and is usually achievable. Where it genuinely is not — a unique service, a group shared function — use published benchmarks or an independent valuation and record why quotations were unavailable.
It is intended for repetitive transactions whose parameters can be specified in advance: the party, the nature, the duration, the maximum aggregate value and the pricing basis. An omnibus approval that says "transactions with group companies up to ₹ 5 crore" specifies nothing and will not withstand scrutiny. Review actual transactions against the approval quarterly, as Clause 5.6 requires.
Clause 9.1(a) is deliberately carved out. The prohibition on loans to directors and to persons in whom directors are interested is separate from, and stricter than, the related party transaction framework, with narrow and conditional exemptions. Do not process a loan to a director through this policy — take advice first.
Approval under company law does not answer the transfer pricing question or the goods and services tax valuation question. Supplies between related persons may be taxable without consideration, and the valuation rules differ from those applied to third parties. A shared service, a management fee or the free use of premises between group companies frequently has a tax consequence that the company law analysis does not surface. Route material related party arrangements past the tax adviser.
The register of contracts must be kept at the registered office, entered at the time of the transaction, placed before the next Board meeting and signed. It is one of the first documents requested in diligence and one of the most commonly found to be written up retrospectively, which is visible from the handwriting and the sequence.
Annexure B, presented every quarter, is what converts this policy from a document into a control. It also produces, without additional work, the disclosure required in the Board’s report at year end and the data the auditors will ask for.
Clause 1.3 extends the policy to subsidiaries. Group companies transacting with each other are related parties, and a policy applied only at the parent leaves the transactions that most often attract scrutiny outside it.
Reflects Indian law current as of {{DATE OF USE}}. The definition of related party, the categories of transaction caught, the thresholds, the audit committee requirement and the applicable listing requirements all change — have the policy reviewed annually by a company secretary against the law as it then stands.
This is a ready-to-use template provided for convenience. Laws and requirements change, and every situation is different — please have it reviewed by a qualified professional (a lawyer, company secretary, or chartered accountant as relevant) before you rely on it.