Related Party Transactions in IPO India 2026: DRHP, Group Companies & Due Diligence
Related party transactions in an IPO are not merely an accounting-note exercise. For an Indian company preparing a DRHP, the related-party population can affect restated financial information, group-company identification, risk-factor drafting, governance diligence and the credibility of reported margins. A pre-IPO finance team should therefore reconcile the related-party universe before the offer-document process becomes time-critical.
Related Party Transactions in IPO India: what must be reconciled before the DRHP
The starting point is the accounting population reflected in the restated financial information. Recent SEBI-filed offer documents show related-party transactions being presented for the relevant interim period and preceding financial years, with cross-references to the restated financial-information notes. They also commonly discuss the possibility of conflicts of interest arising from such transactions. The practical lesson is that the DRHP workstream must reconcile accounting identification, Companies Act approvals, tax/transfer-pricing support where applicable and offer-document disclosures rather than treating each as a separate data set.
Why related parties can also affect the IPO group-company universe
The SEBI ICDR framework uses related-party history as an important input in identifying group companies. Recent offer-document material filed with SEBI states that companies, other than promoters and subsidiaries, with which the issuer had related-party transactions during the period covered by the disclosed financial information may fall within the group-company definition, together with other companies considered material by the board under its materiality policy. This means an incomplete related-party register can create a second-order disclosure problem: it may affect not only the financial note but also the group-company section and related diligence.
A practical pre-IPO related-party reconciliation
A robust finance-led exercise normally starts with a master universe rather than with the ledger alone. Build the population from statutory registers, promoter/director/KMP declarations, subsidiaries and entities under common influence, accounting-system vendor/customer masters, prior financial-statement notes, tax and transfer-pricing records, loan and guarantee schedules, and legal-secretarial records. Then map each entity to the relevant accounting, corporate-law and offer-document classification.
For each related party, reconcile revenue, purchases, services, rent, remuneration, reimbursements, loans, advances, guarantees, deposits, asset transfers and year-end balances across the periods that will feed the restated financial information. Differences between the general ledger, confirmations, audited notes and transaction agreements should be resolved before restatement work is finalized.
The five questions an IPO diligence team should ask
First, is the related-party population complete? Second, were transactions properly approved and documented under the applicable Companies Act framework? Third, do the amounts and classifications reconcile to the restated financial information? Fourth, is there an arm’s-length or transfer-pricing support file where the transaction requires one? Fifth, could the relationship or transaction create an additional group-company, risk-factor, conflict-of-interest or business-dependency disclosure?
Example: why the accounting note alone may be insufficient
Assume an issuer reports substantial sales to an entity connected to the promoter ecosystem. The audited financial statements may correctly disclose the transaction under the applicable accounting standard. During IPO diligence, however, the team must separately consider whether the entity belongs in the group-company population, whether the commercial dependence merits risk disclosure, whether outstanding receivables require explanation, and whether pricing or contractual terms are adequately supported. The accounting disclosure is therefore the beginning of the IPO analysis, not the end.
Common pre-IPO red flags
Frequent diligence issues include entities appearing in promoter or director declarations but missing from the accounting master; large year-end balances with weak ageing support; recurring transactions described as one-off; undocumented reimbursements; loans or advances without a clear commercial trail; inconsistent names or identifiers across GST, MCA and accounting records; material transactions that change sharply immediately before the IPO; and transactions whose commercial terms cannot be readily explained.
Another red flag is inconsistency across documents. If the related-party note, restated financial information, group-company section, risk factors, tax diligence and legal diligence describe different populations or amounts, reviewers may need additional rounds of reconciliation. That can delay an otherwise avoidable part of the DRHP process.
Related-party transactions and normalized earnings
Related-party analysis also connects directly to transaction and valuation work. A recurring promoter-group service charge, below-market rent, non-commercial financing arrangement or unusual related-party revenue stream may require analytical normalization when advisers assess sustainable earnings. That does not mean every related-party transaction should be adjusted. The question is whether the transaction reflects sustainable, supportable economics and whether any adjustment is clearly identified as professional judgment rather than accounting fact.
IPO related-party data-room checklist
The data room should ordinarily contain the related-party master and relationship basis; period-wise transaction ledger; audited and restated note reconciliations; agreements and invoices for material transactions; board, audit-committee or shareholder approvals where applicable; loan, guarantee and advance documentation; transfer-pricing reports or benchmarking where relevant; balance confirmations and ageing; promoter/director/KMP declarations; group-company materiality policy; and a reconciliation explaining additions or deletions from the population.
How this fits with the rest of IPO readiness
Related-party cleanup should be performed alongside restated financial preparation, KPI governance and the objects-of-issue workstream. PGT & Associates has separate practical guides covering each of these areas:
FAQs
Are all related-party transactions prohibited before an IPO?
No. The issue is not a blanket prohibition. The relevant questions are identification, approvals, accounting, disclosure, commercial rationale and compliance with the legal framework applicable to the particular transaction.
Does every related party automatically become a group company?
No. The group-company analysis follows the applicable SEBI ICDR framework and the issuer’s board-approved materiality approach. Related-party history is an important input, but classifications must be made against the current framework and the issuer’s facts.
Should related-party EBITDA always be removed for valuation?
No. Any normalization requires transaction-specific judgment. A genuine recurring arm’s-length transaction may be part of sustainable operations. Adjustments should be evidence-based and clearly distinguished from reported accounting results.
When should a company start the related-party cleanup?
Preferably before the restatement and DRHP drafting processes become compressed. Early reconciliation gives finance, secretarial, tax and legal teams time to resolve population differences and collect missing support.
Practical takeaway
For IPO readiness, related-party transactions should be treated as a cross-functional diligence workstream. The strongest process uses one reconciled master population that feeds restated financials, Companies Act compliance, group-company analysis, tax and transfer-pricing review, risk disclosures and transaction analysis. PGT & Associates can support finance teams with pre-IPO financial cleanup, reconciliation and diligence support; such support does not constitute merchant-banking, securities recommendation or any assurance of SEBI, exchange or listing approval.
Authoritative references
SEBI public-issue filings and current offer documents were used to validate the practical disclosure approach. Companies should apply the SEBI ICDR Regulations and other applicable law as in force for their own filing date.
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