AS | Ankit Sarawagi|Founder, CFOmatrix·July 2026·9 min read | Right-sized SOP |
- An RPT is not wrong, it is just watched. A deal with a director, key managerial person, relative or group entity is fine, provided you identify it, price it at arm’s length, approve it and disclose it.
- Keep a related-party register. List the related parties once, keep it current, and tag their transactions as they happen. That is what turns year-end panic into a byproduct.
- Arm’s length is the test. The related party gets the same terms an independent third party would, evidenced with a quote, a market rate or a valuation on file.
- Approval follows Section 188. Specified RPTs need board approval, and above thresholds shareholder approval; ordinary-course, arm’s length deals are generally exempt from approval but still disclosed. Subject to current law.
- Founder loans count. Paper the loan, book it as a director loan, approve it and disclose it. Same discipline for a founder-owned vendor and a group cross-charge.
| 4 Steps: register, flag, approve at arm’s length, disclose | 188 Companies Act section that governs RPT approval | 1 Register that keeps the whole thing audit-ready |
What a Related-Party Transaction Is, and Who Is a Related Party
A related-party transaction (RPT) is any deal your company does with someone connected to it, rather than with an independent third party. The transaction can be perfectly normal, a loan, a purchase, a rent, a service; what makes it an RPT is who is on the other side. The first job of the process is therefore simple: know who your related parties are, so you can spot a transaction with one the moment it appears.
Who counts as a related party is defined in the Companies Act (Section 2(76)) and, for accounting disclosure, in Ind AS 24. The two lists do not overlap perfectly, so a lean startup should apply the wider of the two when building its register. In plain terms, it is the people and entities close to the company.
- Directors
- Key managerial personnel (CEO, CFO, CS)
- Their relatives (spouse, parents, children, siblings)
- Holding company
- Subsidiaries and associates
- Other entities under common control
- A firm where a director is a partner
- A company a director or relative controls
- A vendor a founder owns
Notice how many of these are ordinary in a startup: the founder is a director, so a founder loan is an RPT; a company the founder also owns is a related party, so buying from it is an RPT; a subsidiary or a sister company is a related party, so a cross-charge is an RPT. This SOP is one of the process guides in the right-sized finance SOPs and controls guide; the underlying RULES on who may transact and on what terms usually live in your finance policy (see the CFOmatrix policy library), while this post is the PROCESS that runs them.
Why Auditors and Investors Scrutinise RPTs
Related-party transactions get a hard look for one reason: they are the easiest place for value to leak out of a company, or for the numbers to be dressed up, because the two sides are not independent. A founder-owned vendor could be overcharging the company; a group cross-charge could be shifting profit; a director’s rent could be above market. So the law and the diligence process build three guardrails around every RPT.
“In every due diligence I have been part of, related-party transactions are on the checklist. The buyer is not assuming you did something wrong; they just want to see that a founder loan, a group charge or a founder-owned vendor was at market and was disclosed. If it is in the register with the approval and the pricing on file, it is a five-minute item. If it is not, it becomes a red flag.”
Ankit Sarawagi, from working across startup finance and diligenceThe SOP: Identify, Approve, Disclose
Here is the whole process, right-sized for a lean team. It runs off a single related-party register and one habit: flag anything with a related party the moment it happens, so approval and disclosure look after themselves.
Every step produces a record and a place it lives: the related-party register (a maintained sheet or a list in the tool), the RPT tag on each transaction in Zoho Books, the arm’s length evidence (quotes, market rate or valuation on file), the approval (board or shareholder resolution in the minutes, or the captured ordinary-course note), and the disclosure note in the financials. That is precisely the paper trail a CARO review and a diligence team ask for, produced as a byproduct of the process rather than as a year-end scramble.
Common Founder-Startup RPTs, and How to Handle Them Cleanly
Most startup RPTs are one of three: a founder lending the company money, a founder-owned vendor supplying it, and a cross-charge between group companies. Each is fine when handled cleanly. The table shows the clean way.
| The RPT | The risk if left loose | Handle it cleanly |
| Founder loan to the company | Mixed with equity or a suspense account; no terms; deposit-rule questions | Simple loan agreement (amount, interest or nil, repayment), booked as a director loan, approved and disclosed |
| Founder-owned vendor | Suspicion of overcharging; profit stripped out | Get independent quotes to prove market rate, take approval, tag as RPT, disclose the value and balance |
| Group cross-charge | Profit shifted between entities; transfer-pricing exposure | A written cost-sharing or service agreement, a defensible allocation basis, consistent both sides, disclosed on both |
| Rent or premises from a director | Above-market rent enriching the director | Benchmark the rent, lease agreement on file, approval, disclosure |
| Director / KMP remuneration | Undisclosed perks; limits breached | Approved per the Companies Act, within limits, disclosed in the RPT note |
The classic mistake is not the transaction, it is the silence around it. A founder wires money into the company and it sits in a suspense account with no agreement; a founder-owned vendor is paid with no quote on file to show the rate is fair; a group charge is booked one side and not the other. The work was done, but nothing was documented, so at diligence it reads as something to hide. Flag it, paper it, approve it and disclose it while it is happening.
Section 188 Approval, in Plain English
Section 188 of the Companies Act is where the approval requirement lives. It covers specified transactions such as sale or purchase of goods or services, leasing of property, and appointment of a related party to an office or place of profit. The rule of thumb is below; the detail is subject to current law, so confirm the current position before relying on an exemption.
Board approval: specified RPTs need prior approval of the board by resolution; the interested director does not participate in the vote. Shareholder approval: above prescribed thresholds, the transaction also needs approval by a resolution of the members. The exemption: transactions in the ordinary course of business and on an arm’s length basis are generally exempt from the Section 188 approval requirement, which is why arm’s length matters so much. Even then, they are still disclosed.
Thresholds, the exact list of covered transactions and the exemptions are subject to current law. Confirm the current position with your company secretary or auditor.
Lean version (5 to 30 people): a one-page related-party register kept by the finance owner, an RPT tag on transactions in Zoho Books, arm’s length evidence in the same folder, and RPTs put to the board at the regular board meeting rather than a separate process. For most early-stage companies the register plus flagging is 90 percent of the work.
When to add a step (as you scale): once you have multiple group entities, formalise a related-party policy, obtain an omnibus approval from the board or audit committee for recurring ordinary-course RPTs at the start of the year, add a formal arm’s length or transfer-pricing study for material cross-charges, and route RPTs through the audit committee where one is required.
Frequently Asked Questions
What is a related-party transaction (RPT)?
A deal your company does with a person or entity connected to it, rather than with an independent third party at arm’s length. Typical startup examples are a founder loan to the company, buying services from a founder-owned vendor, paying rent to a director, a cross-charge between group companies, and remuneration to a director or KMP. The transaction itself is not wrong; what matters is that it is identified as related-party, priced at arm’s length, approved by the right people and disclosed in the financial statements. Who is a related party comes from the Companies Act and, for disclosure, Ind AS 24, subject to current law.
Who is a related party?
Broadly, a company’s directors and their relatives, its key managerial personnel (CEO, CFO, company secretary) and their relatives, holding, subsidiary and associate companies, other group entities under common control, and firms or companies in which a director or relative holds a significant interest or control. Relative covers close family such as spouse, parents, children and siblings. The exact list is in Section 2(76) of the Companies Act and, for disclosure, Ind AS 24; the two differ slightly, so apply the wider of the two when building your register. All definitions are subject to current law.
Do related-party transactions need board approval?
Many do. Under Section 188 of the Companies Act, specified RPTs such as sale or purchase of goods or services, leasing of property, or appointment to an office of profit require prior board approval by resolution, and above certain thresholds also shareholder approval. Transactions in the ordinary course of business and at arm’s length are generally exempt from the approval requirement, but still have to be disclosed. The interested director does not vote on the resolution. Thresholds, exemptions and the list of covered transactions are subject to current law, so confirm before relying on an exemption.
What does arm’s length mean?
The transaction is on the same commercial terms you would have agreed with an unrelated third party: the same price, interest rate, rent and credit terms. The related party is not getting a better deal, and the company is not being stripped of value, because of the relationship. In practice you evidence it with a quote or two from independent suppliers, a market rate, a valuation or a rate card, kept on file with the transaction. Arm’s length matters both because it is the condition for the Section 188 ordinary-course exemption and because auditors specifically test whether related-party deals were priced fairly.
Are founder loans a related-party transaction?
Yes. A loan from a founder or director to the company, very common in early-stage startups, is an RPT and has to be handled cleanly. Document it with a simple loan agreement stating the amount, the interest rate (or that it is interest-free) and repayment terms, record it as a director loan rather than mixing it with equity or a suspense account, take the appropriate approval, and disclose it in the financial statements. The company-law treatment of a director loan, including whether it counts as an acceptance of deposits, is subject to current law, but the discipline is the same: paper it, book it correctly, approve it and disclose it.
How do you disclose related-party transactions for an audit?
In a dedicated note to the financial statements under Ind AS 24 (or the applicable standard), listing each related party, the nature of the relationship, the type and value of transactions during the year, and the closing balances. To produce it without a year-end scramble, keep a related-party register through the year, tag RPTs in your accounting software as they happen, and keep the approval and arm’s length evidence on file. Under CARO 2020 the auditor separately reports on whether RPTs comply with the Companies Act and are properly disclosed, so the register and the trail are exactly what they will ask to see. Disclosure requirements are subject to current law.
This is general educational information for founders, current to mid-2026, and is not legal, tax or audit advice. References to the Companies Act (including Section 2(76) and Section 188), Ind AS 24, CARO 2020, arm’s length pricing, approval thresholds and disclosure requirements are indicative and subject to current law; applicability depends on company type and thresholds. Verify the current position or consult your company secretary or auditor before acting on a specific matter.
Audit Readiness and the Paper Trail
The Right-Sized Finance SOPs and Controls Guide
AS | Founder, CFOmatrix | Finance Strategy & Equity Compliance CFOmatrix is a knowledge platform focused on how finance actually works inside growing companies. This SOP draws on hands-on experience keeping related-party transactions clean for lean startups: the register, arm’s length evidence, Section 188 approval and the disclosure note that stands up to diligence, without big-company bureaucracy. |