What Is Related Party Transaction (RPT)?
A Related Party Transaction (RPT) occurs when a business is involved in monetary transactions with a related party, e.g., its subsidiary companies, immediate family members of directors, key managers, or senior executives. Sales, purchase transactions, loan extensions, lease contracts, or services agreements fall within this provision and must be dealt with clearly and at arm's length to avoid potential conflict of interest.
Important Legislations Regulating Related Party Transactions (RPT)
- IFRS (International Financial Reporting Standards): Mandates disclosure of related party transactions in financial reports.
- US SEC (Securities and Exchange Commission): Requires reporting of RPTs to avoid conflicts of interest.
- India: Regulated by the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations.
- US: Regulated by the Sarbanes-Oxley Act (SOX) and GAAP (Generally Accepted Accounting Principles).
- UK: Regulated by the UK Corporate Governance Code and Financial Conduct Authority (FCA) rules.
Benefits Of Related Party Transactions (RPT)
- Operational Efficiency: Firms can make transactions with affiliates and subsidiaries more efficient.
- Cost Savings: Third-party transactions tend to be more expensive than in-house transactions.
- Business Expansion: Facilitates strategic partnerships and better resource planning.
- Risk Management: Regulatory systems prevent fraud and unequal transactions.
- Enhanced Financial Performance: Synergies among allied parties increase business profitability in general.
Key Takeaways
Related Party Transactions (RPT) refer to financial transactions between a company and its subsidiaries, directors, executives, or close friends. As much as they increase business efficiency, save on costs, and foster growth, they must be guided by international and country-specific legislation to avert conflicts of interest and improper finance management. Proper disclosure maintains transparency, compliance with laws, and investors' trust.
