Related Party Transactions Before an IPO: The Clean-Up Promoters Underestimate

By CA Dhruv Seth, Seth & Associates, Chartered Accountants, Lucknow

Most promoters treat related party transactions as a routine disclosure item. In an IPO they are one of the first things SEBI and the book-running lead managers pull apart, and one of the most common reasons a listing timeline slips. Companies in the Rs 100 crore to Rs 1,000 crore band almost always carry a web of dealings with promoter families, group entities and key managerial personnel that looked harmless while the company was private. The offer document exposes all of it.

Why related party transactions draw scrutiny

Under the SEBI ICDR Regulations, the draft red herring prospectus must carry restated financial statements for the relevant years, together with a full disclosure of related parties and their transactions under Ind AS 24 and Section 188 of the Companies Act, 2013. The merchant banker certifies, through its due diligence certificate, that these disclosures are true and sufficient. Undisclosed or non-arm's-length dealings are read as a governance red flag, because they raise the question of whether promoter and public shareholder interests are truly aligned.

The arrangements to fix early

A pre-IPO review typically throws up the following:

• Rent, royalty or brand fees paid to promoter-owned entities

• Loans and advances given to or taken from group companies and directors

• Purchases or sales routed through related concerns at prices that were never benchmarked

• Personal guarantees given by promoters for the company's borrowings

• Common vendors, shared premises and cost-sharing without written agreements

Each item needs to be unwound, formalised on arm's-length terms, or clearly justified with evidence. Loans and advances to related parties are best settled well before filing; they read poorly in an offer document and invite questions at the roadshow.

Build the governance the market expects

A private company can approve related party dealings informally. A listed one cannot. Well before filing, the company should constitute an audit committee with independent directors, adopt a board-approved RPT policy, and route every related-party dealing through audit committee approval with proper pricing evidence. Running this discipline for several quarters before listing demonstrates that the process is real rather than cosmetic.

Know the post-listing regime you are signing up for

After listing, Regulation 23 of the SEBI LODR Regulations governs these transactions. Every RPT needs audit committee approval, and a material one needs prior shareholder approval by resolution, with related parties abstaining from the vote. SEBI's Fifth Amendment of 2025 replaced the earlier flat limit, the lower of Rs 1,000 crore or 10 per cent of consolidated turnover, with a scale-based framework under the new Schedule XII. For a company in your size band, with turnover well under Rs 20,000 crore, a transaction is treated as material once it crosses 10 per cent of consolidated turnover, and quarterly RPT disclosures to the exchanges become routine. Designing for this regime before you file avoids awkward restructuring afterwards.

The bottom line

Related party transactions rarely sink a listing on their own, but they routinely delay one. Issues surfaced during SEBI review can force a restatement, fresh valuations and difficult conversations with anchor investors. Treating the clean-up as an early workstream, ideally six to twelve months before filing, settling related-party loans, benchmarking pricing, formalising agreements and standing up an audit committee, turns a common source of SEBI queries into a non-issue. The discipline built during this exercise also makes governance after listing considerably easier.

This article is for general information and does not constitute investment, legal or tax advice. Regulations change; please verify the current position or speak to a qualified adviser before acting.