Related party transactions require independent directors to do more than check whether a disclosure has been made. The question is whether the board and audit committee have enough reliable information to understand the transaction, test conflict, assess commercial terms, and record the basis for approval. A conflict disclosed badly is still a conflict.
The first step is identification. The company should maintain an updated related party register, including directors, key managerial personnel, promoter entities, subsidiaries, associates, and other covered relationships under the applicable framework. Independent directors should ask how the register is updated and whether management certifications are being obtained periodically.
The second step is transaction mapping. What is being purchased, sold, leased, licensed, financed, guaranteed, or shared? Which entity benefits? Is the transaction recurring or one-time? Does it sit within ordinary course of business? Are the terms comparable to third-party terms? A short board note should answer these questions without forcing directors to infer the story from annexures.
Pricing support is central. Management should provide quotations, benchmarking, historical prices, margins, valuation notes, or other support where relevant. Independent directors are not expected to become procurement officers, but they should be able to see why the transaction is commercially defensible. If the answer is only "group convenience", the file needs better work.
Conflict handling should be explicit. Interested persons should disclose their interest and abstain where required. Minutes should record the conflict and the manner in which it was handled. The process should not rely on everyone in the room politely remembering who is connected to whom.
Documentation should also address materiality and approvals. Is audit committee approval required? Is board approval required? Is shareholder approval required? Does the company policy impose a lower threshold than the law? These are not cosmetic questions. A technically sound transaction can still create governance risk if the approval route is wrong.
Independent directors should ask whether the transaction creates continuing obligations. Long-term service arrangements, guarantees, shared assets, cost allocations, or intellectual property licences may require periodic review. Approval should not be treated as a lifetime pass. The board should know when the transaction will be reviewed again.
The board should also consider whether the transaction affects minority shareholders, lenders, auditors, or public disclosures. A transaction may be commercially modest but sensitive because of who is involved. Where the company is listed or part of a regulated group, the compliance note should clearly identify the applicable internal policy and disclosure route.
Independent directors should test alternatives where the transaction is material. Was a third-party option available? If not, why not? If yes, why was the related party preferred? The answer may be operational speed, quality, continuity, technical knowledge, or cost. It should be recorded as a reasoned business judgment, not left floating as an assumption.
Follow-up is also part of oversight. If approval was conditional on price review, documentation, performance milestones, or periodic reporting, the next committee paper should show whether those conditions were met. Governance is weakened when conditions are approved carefully and then forgotten quietly.
Finally, minutes should be precise. Record the papers reviewed, the commercial rationale, pricing support, conflict handling, approval basis, and follow-up conditions. Avoid vague statements that the transaction was "noted and approved" without showing the oversight work behind that conclusion.
AGS Consulting supports boards, audit committees, and company secretaries with related party transaction review, governance notes, and minutes discipline. For a focused review of a sensitive transaction, contact AGS Consulting.
FAQs
What should independent directors check in a related party transaction?
They should check identification, conflict handling, commercial rationale, pricing support, approval route, and documentation.
Is disclosure of interest enough?
No. Disclosure is the starting point; the board must still assess process, fairness, records, and approvals.
Why is pricing support important?
It helps show that the transaction is commercially defensible and not merely convenient for connected parties.
Should recurring transactions be reviewed again?
Yes. Long-term or recurring arrangements should be periodically reviewed for terms, performance, and continuing relevance.