Related Party Transactions: Rules for Private Companies

Every family business runs on related-party transactions — the director's godown on rent, purchases from the brother's firm, salary to the founder's son. None of this is illegal; all of it is regulated, and the regulation is mostly a disclosure-and-approval ritual that small companies skip out of ignorance rather than intent. The cost of skipping surfaces in audits (mandatory reporting), diligence (RPTs are the first schedule investors probe) and tax (a parallel regime with teeth). Here is the private-company rulebook.

Who is a 'related party'

• Directors and their relatives (the defined family list: spouse, parents, siblings, children and their spouses...)
• KMP and their relatives
• Firms where a director/relative is partner; private companies where a director/relative is member or director
• Public companies where a director holds with relatives >2%; body corporates whose boards act on your director's instructions
• Holding/subsidiary/associate companies and fellow subsidiaries
• Practical shortcut: collect MBP-1 disclosures from every director at the year's first board meeting — the declared interest map is your RPT radar

Section 188: covered transactions and the golden exemption

The covered list: sale/purchase of goods or materials, property of any kind, leasing property, availing/rendering services, agency appointments in the above, related parties' appointment to any office or place of profit, and underwriting subscriptions. Approvals: board resolution at a meeting (interested directors abstaining) for covered RPTs; shareholder ordinary resolution above prescribed thresholds (turnover/net-worth-linked slabs: e.g., transactions past 10% of turnover for goods/property categories, monthly remuneration limits for office-of-profit). And the exemption that saves daily life: Section 188 approvals don't apply to transactions in the ordinary course of business on arm's-length terms. That phrase — ordinary course + arm's length — is the entire game: document both (market-rate evidence, comparable quotes, the business rationale) and the covered-list machinery relaxes; assert them without paper and auditors disagree in writing.

The tax overlay: the regime with real teeth

• Section 40A(2): excessive payments to related persons disallowed to the extent unreasonable — the assessing officer's favourite family-salary weapon; benchmark and document pay/rent/purchase rates
• Domestic transfer pricing: specified domestic transactions past thresholds need TP documentation where applicable
• Section 2(22)(e) deemed dividend: loans from closely-held companies to substantial shareholders/their concerns — taxed as dividend; the family-group cash-shuffling trap
• GST: related-party supplies are taxable even without consideration (Schedule I) and valued per open-market rules — inter-entity services within family groups (brand use, shared staff) are today's audit frontier

A clean-RPT operating system

The system that satisfies all masters at once: (1) annual MBP-1s + a maintained related-party master list; (2) every recurring RPT papered with an agreement at benchmarked rates (rent with a broker's rate letter, purchases with competitor quotes, salaries with role-comparable data); (3) board approval taken once for framework arrangements, refreshed on renewal, interested directors abstaining and minutes saying so; (4) MBP-4 register entries and financial-statement disclosure reconciled annually; (5) GST invoicing on inter-entity flows even where money doesn't move. Cost: a few hours annually. Return: audits without qualifications, diligence without indemnities, and assessments without 40A(2) haircuts.

How Aidwish helps

Aidwish builds RPT hygiene into family businesses and startups — the disclosure calendar, benchmarking files, framework approvals and registers — so the transactions that make family business efficient stop being the findings that make it expensive.