Kunal Shah had spent eight years building a profitable consumer-products company. Revenue was growing, institutional investors had shown interest and the board had approved preparations for an initial public offering.
The company appointed merchant bankers, lawyers, auditors and other advisers. Historical financial information was being restated, corporate records were being reviewed and the first draft of the offer document was taking shape.
During due diligence, advisers examined payments made to the company’s largest packaging supplier. The prices appeared commercially reasonable, and every invoice had been recorded.
The concern was not the expense itself. The supplier was owned by the promoter’s brother-in-law, and members of Kunal’s family had helped finance its early operations.
The relationship had never been included in the company’s related-party register, board papers or financial-statement disclosures. No formal benchmarking study had been prepared, and the audit committee had never reviewed the transactions.
A commercially explainable arrangement had become a serious pre-IPO disclosure problem.
What Makes a Transaction a Related-Party Transaction?
A related-party transaction cannot be identified only by checking whether two companies have the same shareholder.
Related parties may include promoters, directors, key managerial personnel, relatives, holding and subsidiary companies, entities under common control and businesses over which specified persons exercise control or significant influence.
Transactions can include:
Purchase or sale of goods
Provision or receipt of services
Loans, advances and guarantees
Leasing of property
Asset transfers
Royalty or brand payments
Management charges
Employment or consultancy arrangements
Reimbursement of expenses
Transactions benefiting a related party indirectly
The exact definition depends on the applicable Companies Act provisions, accounting standards and SEBI regulations. A transaction may require disclosure or approval even when it occurs at market value.
“Arm’s length” and “related party” answer different questions. Arm’s-length pricing may support the fairness of the terms, but it does not erase the relationship.
Why It Became an IPO Issue
An IPO requires investors to receive true, fair and adequate information for making an informed investment decision. SEBI’s disclosure framework places extensive responsibility on the issuer, its management and the intermediaries involved in preparing the offer document.
Historical related-party transactions can affect how investors assess:
Promoter influence over business decisions
Independence of revenue and expenses
Profit margins
Conflicts of interest
Movement of funds within the promoter group
Dependence on promoter-connected entities
Corporate-governance standards
The sustainability of reported financial performance
In Kunal’s case, the packaging supplier represented a significant portion of annual procurement. Investors needed to know whether the pricing and commercial terms were independently negotiated and whether the company could obtain equivalent supplies from an unrelated vendor.
Omitting the relationship could make the financial disclosures incomplete even if the underlying purchases were genuine.
The Difference Between Accounting and SEBI Disclosures
The finance team believed that because all purchases had been recorded, the company’s accounts were complete.
That was incorrect.
Recording an expense confirms that a transaction occurred. Related-party disclosure explains the relationship, nature of the transaction, outstanding balances and other information required by the applicable reporting framework.
For an IPO-bound company, the review may extend across:
Restated financial information
Notes describing related parties and transactions
Promoter and promoter-group disclosures
Material agreements
Outstanding loans, guarantees and balances
Board and shareholder approvals
Conflict-of-interest arrangements
Transactions entered into after the latest financial period
A disclosure gap can therefore affect the financial statements, due-diligence reports and offer document simultaneously.
Why Informal Family Relationships Are Often Missed
Related-party compliance frequently fails because companies rely on accounting software rather than an ownership-and-control review.
The ledger may show only a vendor’s legal name. It does not reveal that the vendor is controlled by a director’s relative or that a promoter informally influenced its decisions.
Common warning signs include:
Vendors introduced directly by promoters
Common addresses, telephone numbers or employees
Shared directors or authorised signatories
Interest-free funding from promoter-family members
Unusually favourable payment terms
Entities dependent on one group company
Transactions approved outside normal procurement procedures
Personal guarantees supporting another entity
Services supplied without detailed agreements
A pre-IPO review should trace the natural persons behind material customers, vendors and intermediaries rather than relying only on entity names.
How Listed-Company Requirements Raise the Standard
Once listed, a company enters a more demanding related-party compliance environment under the SEBI Listing Obligations and Disclosure Requirements Regulations.
Regulation 23 provides the central framework for related-party transactions, including audit-committee oversight and shareholder approval for material transactions, subject to the applicable provisions, exemptions and thresholds.
SEBI’s LODR Regulations were updated as recently as January 22, 2026, making it essential for companies to work from the current text rather than an old compliance checklist.
SEBI has also prescribed industry standards concerning the minimum information to be given to audit committees and shareholders when approval is sought for related-party transactions.
This means that merely placing a transaction value before the audit committee may be insufficient. Decision-makers may need information about the related party, commercial purpose, pricing basis, financial impact and benefits to the listed entity.
What the Company Had to Do
Kunal’s company could not solve the problem by inserting one sentence into the draft prospectus.
The remediation process required the company to:
Identify the supplier’s complete ownership and control structure.
Map the relationship with the promoter and his relatives.
Reconstruct historical purchases and outstanding balances.
Review whether earlier board, audit-committee or shareholder approvals were required.
Assess compliance with the Companies Act and accounting standards.
Benchmark pricing, credit terms and commercial conditions.
Correct the related-party register and financial disclosures.
Evaluate whether past financial statements required adjustment.
Update the IPO due-diligence and risk-factor documentation.
Establish a compliant approval process for future transactions.
The company also had to explain why the relationship was missed and demonstrate that the omission was not part of a wider pattern of undisclosed promoter-linked dealings.
Could the IPO Still Proceed?
An identified related-party issue does not automatically prevent a company from completing an IPO.
The outcome depends on the transaction’s materiality, commercial substance, legal compliance, accounting treatment and whether the disclosure can be corrected transparently.
However, unresolved issues can delay the offer-document process, increase due-diligence work and weaken investor confidence. If information supplied to advisers or regulators is inaccurate, the consequences may be considerably more serious.
The safest course is to identify and remediate related-party matters before formal IPO documentation begins.
The Larger Takeaway
Related-party compliance is not simply an annual financial-statement note. It is a governance system connecting ownership data, contracts, accounting records, approvals and public disclosures.
Kunal’s company had correctly recorded every invoice but failed to disclose the relationship behind those invoices. That distinction became critical when the business sought public capital.
Companies planning an IPO should assume that advisers will examine not only what the business paid, but who ultimately benefited and how the terms were approved.
Shunyatax Global Insights
IPO readiness should include a historical related-party diagnostic covering promoters, directors, relatives, group entities, material vendors, customers, loans, guarantees and informal commercial arrangements.
Shunyatax Global can assist with pre-IPO compliance reviews, related-party mapping, transaction reconciliation, financial-statement disclosures and preparation of governance processes aligned with listed-company requirements.
Contact Shunyatax Global
Phone: +91 94615 14198
Email: office@shunyatax.in
Website: www.shunyatax.in
Disclaimer: The character and circumstances used in this article are illustrative. Disclosure and approval requirements depend on the company’s facts, applicable accounting framework, transaction value and current provisions of the Companies Act, SEBI ICDR Regulations and SEBI LODR Regulations. This content is intended for general information and does not constitute legal, investment or financial advice.