IAS 24 Related Party Transactions: What NFRA and Big 4 Look For in India
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Sai Manikanta Pedamallu
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IAS 24 Related Party Transactions: What NFRA and Big 4 Look For in India
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
NFRA has stated the position directly: related party relationships and transactions have been a source of major frauds in corporate history, and some of the same methods continue to appear in recent corporate frauds.
That is why related party transactions attract more sustained regulatory attention in India than almost any other area of financial reporting, and why they recur in inspection findings cycle after cycle. Deficiencies continue to be observed across related party transactions, impairment assessments, going concern evaluations, and audit documentation, and what is notable is the degree to which the same themes have recurred across firms and over time.
Post 80 covered the IAS 24 definition, exemptions, and common omissions. This post covers what actually gets found in India, and what the regulator and the audit committee are looking for.
The Three-Framework Problem
An Indian related party transaction sits inside three separate frameworks, and this is the structural reason compliance failures are so common.
Ind AS 24 governs disclosure. It asks what must be told to users of the financial statements.
The Companies Act 2013 governs approval and legality. Section 188 requires board or shareholder approval for specified transactions with related parties outside the ordinary course of business or not at arm's length. Section 185 prohibits a company from advancing loans, directly or indirectly, to directors or persons in whom directors are interested. Section 186 restricts loans, guarantees, and investments.
SEBI's listing regulations govern approval and disclosure for listed entities, requiring audit committee approval for related party transactions and shareholder approval for material ones, with its own materiality thresholds and its own definition boundaries.
Each framework uses its own definitions and thresholds. An entity can satisfy the Companies Act approval requirements and still have deficient Ind AS 24 disclosure, and it can have flawless Ind AS 24 disclosure while having entered a transaction that Section 185 prohibits outright.
The frameworks are asking different questions. Treating a Section 188 approval as evidence of Ind AS 24 compliance, which happens routinely, addresses neither.
What NFRA Has Actually Found
NFRA's inspection reports and penalty orders have identified a consistent set of issues in related party transactions: concerns about diversion of funds, absence of required approvals, inadequate evaluation of business rationale, and lack of appropriate and complete disclosures.
Major related party transactions are grouped by NFRA into categories including loans, investments, and remuneration of key management personnel, and each carries its own failure pattern.
A Case Worth Studying
An NFRA inspection report issued in December 2024, following an August 2024 inspection of three audit engagements for financial years ending March 2022 and March 2023, described a transaction structure that repays close attention.
The company raised Rs. 550 crore through the issue of non-convertible debentures. It then invested Rs. 650 crore in compulsorily convertible preference shares of its promoter entity. The funds were reportedly used to facilitate debt repayment by the promoter entity.
NFRA's findings on this structure covered four distinct failures.
No documented business rationale. The investment in the promoter entity's CCPS had no recorded commercial justification, which suggested the funds had effectively been diverted for the promoter's benefit.
Probable statutory violation. The arrangement likely contravened Section 185 of the Companies Act, which prohibits companies from extending loans directly or indirectly to directors or their relatives. The indirect limb is the operative one: the transaction was structured as an equity-linked investment, not as a loan.
Ambiguous disclosure. The financial statements disclosed the transactions in terms that failed to highlight their substance. The individual components were visible; the arrangement they collectively constituted was not.
Inadequate audit documentation. The audit team's working papers did not address the complexity of the arrangement.
The structure illustrates the central point. Each component, standing alone, is unremarkable. A company issuing NCDs is ordinary. A company investing in preference shares is ordinary. Taken together, with the proceeds routed to a promoter entity to service that entity's debt, the arrangement is something else entirely, and neither the disclosure nor the audit reached that conclusion.
Transactions With Unrelated Parties That Benefit Related Parties
This is the point NFRA has flagged that most preparers do not have in their identification framework at all.
In some cases, transactions with unrelated parties have the purpose and effect of benefiting related parties.
The mechanism is straightforward. Funds move to a third party who is genuinely unrelated by any IAS 24 test, and that third party then transacts with, funds, or otherwise benefits a related party. Because each individual leg involves an unrelated counterparty, no leg appears in any related party identification process built on counterparty screening.
Identification systems that work by matching counterparties against a related party master list will not detect this. Detection requires examining the purpose and effect of transactions, particularly those outside the ordinary course of business, those without evident commercial rationale, and those involving circular flows of funds.
This is also precisely why the audit standard on related parties requires the auditor to remain alert for information indicating related party relationships or transactions that management has not previously identified or disclosed.
Business Rationale as an Audit Requirement
The absence of documented business rationale appears repeatedly in NFRA findings, and it is worth being clear that this is not a governance nicety. It is an audit requirement.
Where related party transactions are outside the entity's normal course of business, the auditor is required to evaluate the business rationale, or its absence, and to consider whether the rationale suggests the transactions may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets.
The evaluation is not satisfied by management assertion. It requires the auditor to understand why the transaction occurred, on what commercial basis, and whether the stated rationale is consistent with the entity's business, the transaction's terms, and its economic effect.
A transaction with no rationale that a disinterested observer would recognise as commercial is, by itself, a fraud risk indicator.
The Approval Trail
NFRA findings have repeatedly identified absence of required approvals, and the audit response is specific.
The auditor examines whether related party transactions have been approved by the audit committee where required, whether board approval was obtained where Section 188 requires it, whether shareholder approval was obtained for material transactions under SEBI's listing regulations, and whether interested directors abstained where they were required to.
Two failure patterns recur.
Omnibus approvals used beyond their scope. Audit committees may grant omnibus approval for repetitive transactions within defined limits. Transactions falling outside those limits, or outside the categories approved, require specific approval. Treating an omnibus approval as covering a materially different transaction is a control failure.
Post-facto ratification treated as approval. A transaction entered into first and ratified afterwards has not been approved in the manner the framework contemplates, and the sequence is itself an audit finding.
The Documentation Problem
Across NFRA inspection cycles, a consistent observation is that audit documentation is sometimes incomplete, insufficiently linked to identified risks, or finalised too close to, or after, the audit sign-off stage.
For related party work specifically, this manifests in three ways.
Risk identification not linked to procedures. The audit file identifies related party transactions as a significant risk and then contains procedures that do not respond to that risk in any specific way.
Conclusions without evidence. A working paper concludes that transactions were at arm's length or had commercial rationale, without documenting what was examined to reach that conclusion.
Late completion. Documentation assembled after the opinion has effectively been formed does not demonstrate that the work informed the opinion.
What Audit Committees Are Being Told to Ask
NFRA has issued an Auditor-Audit Committee Interactions Series, with one part addressing related party relationships, transactions, and disclosures under Ind AS 24 and the corresponding auditing standard. Its purpose is to set out the questions audit committees and boards should be putting to auditors.
The questions worth anticipating:
How did the auditor obtain an understanding of the entity's related party relationships and transactions, and what procedures were performed to identify relationships management had not disclosed?
For transactions outside the normal course of business, what business rationale was evaluated, and what did the auditor conclude?
Were transactions with apparently unrelated parties assessed for whether their purpose or effect was to benefit a related party?
Were all required approvals obtained, in the correct sequence, with interested parties abstaining?
Do the financial statement disclosures convey the substance of the arrangements, or only their legal form?
Were any related party relationships or transactions identified that management had not previously disclosed, and how was that addressed?
An audit committee asking these questions changes the audit. An audit committee that receives a summary schedule of related party transactions and asks nothing does not.
Where the Disclosure Fails
NFRA has separately observed that disclosures in notes to financial statements are sometimes neither relevant nor useful to users and have the potential to obscure material information.
Applied to related party disclosure, three failures dominate.
Form without substance. Individual transactions are disclosed accurately while the arrangement they form is not described. The NCD and CCPS structure described above is the paradigm case: both legs disclosed, the arrangement invisible.
Aggregation that conceals. Transactions aggregated by category and counterparty type, in a manner that prevents a user from identifying any individual significant transaction. Ind AS 24 permits disclosure by category, but not where individual transactions are significant enough that aggregation removes the information.
Incomplete particulars for loans. In one penalty order, NFRA found that critical and sensitive information regarding related party transactions was not adequately disclosed, and full particulars of loans were not disclosed as required. Terms, security, repayment schedules, interest rates, and guarantees are all part of the required disclosure, not optional detail.
A Practical Checklist
For preparers and audit committees, the following questions identify most of what regulators find.
Does the related party register include entities controlled by key management personnel and their close family members, or only group entities visible from the structure chart?
Have relationships that existed during the period but ended before the reporting date been captured?
Has any transaction been assessed for whether its purpose or effect is to benefit a related party, even where the counterparty is unrelated?
For every transaction outside the ordinary course of business, is there contemporaneous documentation of the commercial rationale?
Does any arrangement involve funds leaving the company and reaching a promoter or director entity by any route, however indirect?
Were the required approvals obtained before the transaction, from the correct body, with interested parties abstaining?
Do the disclosures describe the substance of arrangements, or only their component legs?
Are full particulars disclosed for loans and guarantees, including terms, security, and repayment arrangements?
Where an arm's length assertion is made, does evidence substantiating it exist?
The Regulatory Environment
NFRA's inspection programme has two components: Financial Reporting Quality Review Reports, which examine the financial statements themselves, and Audit Quality Review Reports, which examine the auditor's work. Both are published.
The programme has expanded to cover the largest audit firms operating in India, including affiliates of global networks and leading domestic practices, and firm-level inspections now sit alongside engagement-level reviews. Inspection programmes are designed not only to identify deficiencies in completed audits but to evaluate whether firms have established processes capable of preventing similar issues in future engagements.
The regulator's scope and procedures have been the subject of litigation, with proceedings concerning the validity of certain show cause notices and the extent of NFRA's disciplinary jurisdiction having reached the higher courts. That dispute concerns process and jurisdiction rather than the substance of the findings, and the technical observations in the inspection reports stand on their own merits regardless of its outcome.
For preparers, the practical implication is unchanged: related party findings are published, they name firms, and they describe transactions in enough detail to be recognisable.
What Big 4 Auditors Focus On
Completeness of the related party population. Auditors test the identification process against sources independent of management's register: statutory filings, directors' disclosures of interest, shareholding records, and the group structure, alongside enquiry of those charged with governance.
Transactions outside the normal course of business. These receive specific attention because the auditing standard requires evaluation of business rationale for them. Auditors examine the terms, the counterparty, the timing, and whether the arrangement makes commercial sense independent of the relationship.
Fund flows to promoter and director entities by any route. Given the Section 185 indirect limb and NFRA's findings, auditors trace significant investments, loans, guarantees, and advances to their ultimate destination rather than stopping at the immediate counterparty.
The approval trail and its sequence. Auditors verify that approvals preceded transactions, came from the required body, and that interested directors abstained.
Substance of disclosure. Auditors assess whether the notes convey the arrangement or merely its components, and whether a user could understand the economic effect from what is disclosed.
Unsubstantiated arm's length assertions. Where the entity asserts arm's length terms, auditors test for evidence and challenge the assertion where none exists.
Dip IFRS Exam Angle
Indian enforcement context does not appear in Dip IFRS questions, but the underlying principles are examined.
Most tested areas connecting to this post:
Identifying related parties from a described structure, including entities controlled by key management personnel and close family members.
Recognising that disclosure is required regardless of whether a price was charged.
Recognising that the arm's length assertion is permitted only where substantiable.
Applying the requirement to disclose terms, conditions, security, and guarantees for outstanding balances.
The transferable insight: the exam tests identification of relationships from a structure chart. Practice tests identification of arrangements from transaction flows. The second is harder, and it is where regulators find failures.
FAQ
Does board approval under Section 188 mean the transaction is properly disclosed under Ind AS 24?
No. The frameworks address different questions. Section 188 governs whether approval was required and obtained. Ind AS 24 governs what must be disclosed to users. Compliance with one is not evidence of compliance with the other.
Can a transaction with an unrelated party be a related party issue?
Yes, where its purpose or effect is to benefit a related party. NFRA has specifically identified this pattern. Counterparty-based identification processes do not detect it; assessment of purpose and effect is required.
Why does Section 185 matter for an investment rather than a loan?
Because it prohibits advancing loans directly or indirectly. An arrangement structured as an investment, where the economic effect is to place funds with a director-related entity, can fall within the indirect limb notwithstanding its legal form.
Is documented business rationale a legal requirement or an audit expectation?
The auditing standard requires the auditor to evaluate the business rationale for related party transactions outside the normal course of business, and to consider whether the rationale, or its absence, indicates fraud risk. Where no rationale is documented, the auditor has nothing to evaluate, which is itself a finding.
What makes a related party disclosure inadequate when each transaction is disclosed?
Disclosure of components without disclosure of the arrangement they constitute. Where separate legs of a single economic arrangement are each disclosed in isolation, a user cannot identify the arrangement, and the substance has not been conveyed.
Does an omnibus audit committee approval cover all transactions with that counterparty?
No. Omnibus approval covers repetitive transactions within the categories and limits approved. Transactions outside those parameters require specific approval, and treating the omnibus approval as covering them is a control failure.
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This is Post 82 of the Global Fin X IFRS Series. Previous: IFRS 8 Operating Segments: CODM Test, Aggregation and Reconciliation. Next: Post 83: IFRS 8 vs IAS 14: How Segment Reporting Changed and Why the CODM Concept Was a Shift.