How to check related party transactions in an annual report

Sameer Chai buys ₹6 crore of milk a year from a dairy owned by Sameer's sister. It pays market rates, the audit committee approved it, and everyone in the office knows.

Where to look

Related party deals turn up in four places in an annual report and around it. Each tells you something the others don't.

1. The related party note in the accounts

Search the PDF for "related party". Deep in the notes to the financial statements is a note, under the accounting standard Ind AS 24, in three parts:

• Who the related parties are, by name and relationship: subsidiaries, KMP, directors, their relatives, and firms they control. Our list includes Sameer Chai Foods, the three KMP, the directors, and the dairy, described as a firm owned by a relative of the Managing Director.
• What was done with each during the year: purchases, sales, loans, rent, pay. The dairy line shows ₹6 crore of purchases.
• What's still owed at the year end, either way.

This is the fullest list. Read it first. Note whether the company shows it standalone, consolidated or both, and stick to one.

2. Form AOC-2 in the Board's report

The Board's report must include particulars of related party contracts covered by Section 188, in a prescribed form. That form is AOC-2, usually an annexure. It has two parts: deals not at arm's length, and material deals that are at arm's length.

Part one should almost always say "Nil". If it doesn't, stop and read every word. Our dairy deal is at market rates and below the material line, so many companies in our place would show nothing in either part. That's why AOC-2 alone isn't enough. A "Nil" form means nothing crossed its lines, not that nothing happened.

3. The corporate governance report

SEBI's rules make listed companies give, in this report, a web link to their policy on related party transactions and a disclosure of any materially significant related party deal that may conflict with the company's interests. Follow the link. The policy says how the company defines a "material modification", how it gets prices checked, and what the audit committee looks at.

There's a fifth place, outside the annual report. Every six months, on the day the results come out, a listed company files its related party transactions with the stock exchanges. So you can watch them half-year by half-year, not just once a year.

4. The AGM notice

Material deals need shareholders' prior approval, and that happens through a resolution, usually at the AGM. The notice carries the resolution and an explanatory statement: who the party is, how much, for how long, and why. Related parties can't vote in favour, whether or not they're party to that deal. That's where outside shareholders have real power.

Ours has no such resolution, because the dairy deal isn't material. Which brings us to the tests.

What to check

Test 1, size

Put the deal next to three numbers.

The material line comes from SEBI's Schedule XII. For a company with consolidated turnover up to ₹20,000 crore, a related party deal is material once it passes 10% of last year's consolidated turnover. That's the rule since the LODR amendment of 19 December 2025, which replaced the older "₹1,000 crore or 10%, whichever is lower" test with a sliding scale for bigger companies. Our consolidated turnover is ₹128 crore, so the line is ₹12.8 crore.

Two details catch people out:

• It's consolidated, even though our ₹6 crore is bought by the standalone company. Use the group figure, not the company's own ₹120 crore.
• It's cumulative. The test counts the deal "individually or taken together with previous transactions during a financial year". Splitting one big order into ten small ones doesn't get under the line.

Payments to a related party for using a brand or for royalty have a tighter line: 5% of consolidated turnover.

Test 2, price

Arm's length means the price strangers would agree. The report usually just asserts it. Look for how the company backs it up: in the policy, in the audit committee's process, or in the AGM statement for a material deal. Quotes from other dairies, a published milk price, or a formula tied to one are the kind of evidence you hope to see.

This also matters for the Companies Act. Section 188 board and shareholder approvals don't apply to deals in the ordinary course of business at arm's length. A listed company still has to follow SEBI's Regulation 23 either way.

Test 3, approvals

Every related party deal at a listed company needs the audit committee's prior approval, and only its independent directors may approve. Ours has three members, all independent: the retired banker, the food-safety scientist and the former tax officer.

Milk is bought every week, so the committee can give an omnibus approval: one approval for repeated deals. The rules make it name the party, the kind of deal, the period, the maximum amount and the price or the formula for it. It lasts at most a year, and the committee reviews what was actually bought against it every quarter.

Red flags

None of these proves anything. Each is a reason to read the note again.

• Growing faster than the business. Related party purchases that rise each year as a share of revenue.
• Sitting just under the line. A deal that lands at 9.5% of consolidated turnover year after year.
• Money going out, not goods coming in. Loans, advances or guarantees to promoter companies, or deposits with them.
• One-off asset deals. Land, a building or a business bought from or sold to a related party, especially with no independent valuation mentioned.
• Royalty and brand fees to a promoter company that climb faster than sales.
• Frequent ratifications. Deals approved after they happened, again and again.
• Vague words. "Various transactions" or "as per agreement", with no amount or price basis.
• Votes and remarks. A material deal resolution that outside shareholders voted down, or a comment from the auditor or the secretarial auditor.
• The subsidiary route. Deals done through a subsidiary still count. If Sameer Chai Foods bought from the dairy, any deal over ₹1 crore would need our audit committee's approval too, because ₹1 crore is already above 10% of its ₹8 crore turnover.