Investors closely examine Related Party Transactions (RPTs) during due diligence because they can impact financial transparency and business integrity. While RPTs are common, lack of clarity can raise red flags. Here’s why they matter:
- Risk of Fund Misuse: Are company funds being diverted to entities owned by founders or key stakeholders?
- Distorted Financials: Inflated revenue or hidden expenses through related parties can misrepresent a true financial position.
- Lack of Transparency & Poor Governance: Failure to disclose related parties or transactions in the financial statements, along with inadequate approval and documentation, can indicate poor governance, lack of transparency, or even intentional misrepresentation.
- Regulatory Compliance: RPT disclosures are a mandatory requirement as per the provisions of Companies Act, Income Tax Act, and SEBI regulations. Any non-disclosure may result in legal and tax complications.
Pro Tip: Always document RPTs properly, ensure they are at arm’s length, and disclose them in financial statements.
How does your company manage related party transactions? Share your experiences or ask your questions in the comments!
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