The things in the footnotes

The statements are checked, totalled and summarised. The notes are where the things that do not summarise live.

Related party transactions

Dealings between the company and entities connected to it — the promoters, their other companies, key management, subsidiaries and associates.

SEBI's definition is deliberately wide. Regulation 2(1)(zb) defines a related party as one under the Companies Act 2013 or under the applicable accounting standards, and SEBI's FAQ is explicit that meeting "either of the two" is enough. On top of that, two groups are deemed related parties:

• anyone in the promoter or promoter group;
• anyone holding 10% or more of the equity, directly or beneficially, at any time during the immediately preceding financial year.

Note "at any time during" — a holder who crossed 10% and sold down is still caught for that year.

Why it is disclosed

Because the terms may not be what an unconnected party would have agreed. That is the entire point of the disclosure, and it is why the note exists separately rather than being folded into revenue and purchases.

Three things to work out:

How much revenue is with related parties? Revenue depending on a relationship is more fragile than revenue won in a market. A company selling largely to entities its promoter controls has a customer base that could change for reasons unconnected with its products.

How much purchasing is with related parties? The mirror risk: buying from a connected supplier at above-market prices moves money out of the listed company and into an entity the promoter owns more of.

Are there loans, guarantees or advances? Cash lent to a connected entity is cash the listed company no longer has, and a guarantee is an obligation that may become real.

The approval requirement

SEBI puts a real check on the material ones. Under Regulation 23(4), all material related party transactions and subsequent material modifications require prior approval of shareholders by resolution — and, as SEBI's FAQ makes clear, "no related party shall vote to approve such resolutions whether the entity is a related party for the particular transaction or not."

Read that second clause: a related party cannot vote on any such resolution, not merely the ones it is party to. So material related party transactions are approved by the unconnected shareholders alone.

That makes the resolution notices worth reading. They explain the transaction in more detail than the annual report note, and they are published before the transaction happens rather than after.

Contingent liabilities

Obligations not recognised on the balance sheet because they have not crystallised or cannot be reliably measured: tax disputes, legal claims, guarantees given, claims not acknowledged as debts.

They are real, sized where possible, and deliberately outside the numbers you read in chapter 5.

How to read them:

Compare the total with net profit and with equity. Contingent liabilities several times annual profit are worth understanding in detail rather than noting.

Separate the routine from the serious. Indian companies commonly carry long-running tax disputes which frequently resolve for far less than claimed. A guarantee of a subsidiary's borrowings is a different kind of item.

Watch the trend. A balance growing year after year means disputes are accumulating faster than they resolve.

Pledged promoter shares

Chapter 6 of the equity subject covered this and it belongs in any footnote checklist, because the mechanism is mechanical rather than reputational: if the price falls below the agreed cover, the lender can sell the pledged shares, which pushes the price down further.

It is disclosed in the shareholding pattern every quarter and it converts a bad quarter into a collapse.

Off-balance-sheet and the rest

Operating leases and commitments. Capital commitments contracted but not provided for — money the company has already agreed to spend.

Subsidiaries and associates. The list, with holdings. An entity with a 49% stake that is not consolidated can carry obligations that affect the group.

Employee stock options outstanding. Future dilution, invisible on any price chart. Chapter 5 of the equity subject.

Going concern. If there is material uncertainty about the company continuing, it appears here and in the audit report of chapter 7. Rare, and decisive when present.

The reading order

1. Related party transactions — size against revenue and purchases.
2. Contingent liabilities — total against profit and equity, and the trend.
3. Pledged shares, from the shareholding pattern.
4. Commitments and guarantees.
5. Options outstanding.

Twenty minutes, and it is the part of the accounts most likely to contain something the share price has not reflected.

The point

A related party is anyone caught by the Companies Act or the accounting standards, plus promoters and anyone holding 10% at any point in the preceding year — and material transactions need prior approval from shareholders with no related party voting at all. Contingent liabilities are real obligations deliberately outside the balance sheet. These notes are where surprises are disclosed before they arrive.