In boardrooms today, Related Party Transactions often start simply. For example, a promoter might say, "My brother runs a logistics firm. They are good, and we can get a low rate."

At first, this sounds smart. Also, it feels efficient. But in 2026, Related Party Transactions (RPTs) are a major risk. They are the top cause for fraud audits in India. What looks like a discount often looks like theft to SEBI. So, if you approve these deals just to be nice, you are in danger.

Many directors think that honesty is enough. You might say, "If we list it in the Annual Report, we are safe."

But this is wrong.

Under Section 188 of the Companies Act, 2013, listing the deal is just the last step. The first step is to prove it is fair. Also, regulators now ask tough questions. They do not just ask if you listed the Related Party Transactions. Instead, they ask why you did them.

For instance, imagine your company pays a promoter’s firm too much. That is not a business deal. In fact, it is stealing money from shareholders. If you sign off on it, you are liable. As we noted in our guide on Independent Director Liability, staying silent is risky.

So, how do you spot a bad deal? You cannot just trust people. Before you approve any Related Party Transactions, use this simple list.

1. The "Arm’s Length" Proof

The term "Arm's Length" needs proof.

  • The Question: "Do we have three outside quotes?"

  • The Fix: Ask for real market prices. For example, if the promoter charges ₹100, but others charge ₹90, why pay more? You need hard facts to justify Related Party Transactions.

2. The "Ordinary Course" Alibi

Many deals try to avoid rules by claiming they are "normal."

  • The Question: "Is this deal needed for our main business?"

  • The Fix: Use logic. If a software firm buys land from a promoter, it is odd. We saw similar errors in the Kaynes Technologies Crisis, where the board lost focus.

3. The "Omnibus" Loophole

This is a common way to hide fraud.

  • The Question: "Are we approving a lump sum without details?"

  • The Fix: Never sign a blank check for Related Party Transactions. Instead, ask for a review every quarter. If they used ₹10 Cr, ask to see the bills before you give more.

4. The "Look-Through" Test

Fraudsters often hide their names.

  • The Question: "Who really owns the vendor?"

  • The Fix: The vendor might be a private firm. However, the owner could be the promoter’s driver. So, ask for a Beneficial Ownership Declaration (MGT-1).

History is full of firms that failed due to bad Related Party Transactions.

Remember the DHFL case? Billions were stolen through loans to fake companies. The directors said they trusted the audits. Yet, the courts did not care.

This proves that knowing your job is vital. As shown in Corporate Governance Structures, the Audit Committee protects the owners. If you close your eyes, you fail.

Conclusion

In family businesses, Related Party Transactions are common. They are not always bad. But as an Independent Director, you must be the Gatekeeper.

The next time a deal comes up, ask if it is right. As discussed in Why Ethical Behaviour in Business Is Essential, a bad name costs more than a lost deal.

Finally, use this checklist. If the deal feels like a favor, do not just stay quiet. Veto it.