Although both phrases sound similar, they have different meanings and implications under corporate and accounting law. Understanding the distinction is essential for compliance, transparency, and proper financial reporting.
1. RELATED PARTY TRANSACTION (RPT)
A Related Party Transaction (RPT) refers to a specific kind of transaction that a company enters into with a person or entity that is classified as a “related party” under the Companies Act, 2013 or relevant accounting standards.
The term doesn’t just describe any transaction between related parties — rather, it includes only those transactions that fall within certain prescribed categories and may have a potential conflict of interest.
Definition under Section 188 of the Companies Act, 2013
A related party transaction includes the following dealings between a company and its related party:
1. Sale, purchase, or supply of any goods or materials
2. Selling or otherwise disposing of, or buying, property of any kind
3. Leasing of property of any kind
4. Availing or rendering of any services
5. Appointment of any agent for purchase or sale of goods, materials, services, or property
6. Appointment of a related party to any office or place of profit in the company, its subsidiary, or associate company
7. Underwriting the subscription of any securities or derivatives thereof of the company
These transactions, when conducted between the company and a related party, are governed by Section 188 and require Board or shareholders’ approval depending on the monetary thresholds prescribed in the Companies (Meetings of Board and its Powers) Rules, 2014.
Purpose of Regulation
The primary objective behind regulating RPTs is to ensure that:
- Such transactions are conducted at arm’s length and in the ordinary course of business, and
- They do not result in undue advantage to related parties at the expense of shareholders or the company’s interest.
Examples
- A company sells machinery to a partnership firm in which one of its directors is a partner.
- The company takes on lease a property owned by a director’s relative.
- A holding company provides a guarantee on behalf of its subsidiary.
Each of these qualifies as an RPT if the counterparty is a “related party” as defined under Section 2(76) of the Companies Act, 2013.
2. TRANSACTION WITH A RELATED PARTY
A transaction with a related party is a broader term that encompasses any financial or commercial dealing with a related party, whether or not it meets the definition of a “related party transaction” under Section 188.
In other words, every RPT is a transaction with a related party, but not every transaction with a related party is an RPT.
Nature of These Transactions
These may include normal, day-to-day dealings that:
- Are not of the kind specified in Section 188, or
- Are conducted in the ordinary course of business and at arm’s length,
and therefore do not require specific approvals.
Examples
- Payment of salary to a director or relative employed in the company as per service rules.
- Reimbursement of expenses incurred by a director on behalf of the company.
- Routine purchase of low-value office supplies from a firm owned by a relative of a key managerial person (if within permissible limits).
While these are still transactions with related parties, they may not qualify as related party transactions requiring approval under Section 188.
However, disclosure may still be required under Accounting Standard (AS) 18 or Ind AS 24, as these standards focus on transparency in reporting the company’s relationship with related parties.
3. KEY DISTINCTION
| Basis | Related Party Transaction (RPT) | Transaction with a Related Party |
| Scope | Narrower — covers only those transactions specified under Section 188 | Broader — includes all transactions involving related parties |
| Focus | Type of transaction and its regulatory implications | Relationship between the parties |
| Legal Framework | Governed by Section 188 of the Companies Act, 2013 | Governed mainly by disclosure requirements under AS 18 / Ind AS 24 |
| Approval Requirement | May require Board / Shareholders’ approval depending on value thresholds | Usually no prior approval required unless it becomes an RPT |
| Disclosure | Mandatory under both the Act and accounting standards | Required under accounting standards if material |
| Example | Company sells assets to a director’s firm | Company reimburses a director’s official travel expenses |
4. CONCLUSION
In summary:
- A “Related Party Transaction” is a regulated subset of transactions between related parties that carry a higher potential for conflict of interest and hence require prior approval and disclosure.
- A “Transaction with a Related Party” is a wider concept, referring to any transaction with related persons or entities, irrespective of whether it triggers Section 188 provisions.
The distinction is important for companies to:
- Maintain compliance with the Companies Act,
- Ensure transparency in financial statements, and
- Uphold good corporate governance
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