Related party transaction
Also called: related-party transaction
A deal between a company and its own promoters, directors or their other businesses. Normal in small doses, a warning sign in patterns.
A related party is anyone who can influence the company from the inside: promoters, directors, senior managers, their relatives and the companies they own. Buying raw material from a sister company or renting an office from the chairman are both related party transactions.
Every listed company must list them in a note to its annual report. Under SEBI’s rules, a material deal, broadly one worth more than 1,000 crore rupees or 10 percent of annual turnover, whichever is lower, needs shareholders’ approval, and the related parties themselves cannot vote on it.
Example
A cement company pays 400 crore rupees a year to a transport firm owned by the promoter’s son, at rates above what other transporters charge. Profit that belongs to all shareholders is leaking to one family.
Watch out
Look for patterns rather than single deals: loans to promoter companies, guarantees given on their behalf, or purchases from them growing faster than the business itself.
Learn it properly in
Chapter 1.1: How to read an annual report without falling asleep