The Companies Act, 2013 was introduced to motivate the companies to be on a “Jet Set Go” motto with compliance and transparency being the key. Among the multifarious issues outlined in this act, Related Party Transactions took a turn, and this is a term that has been making all companies edgy about the complexities surrounding it for umpteen years.
Related Party Transaction
In Corporate Business, a Related Party Transaction (RPT) is a transaction which takes place between two parties holding pre-existing connection or relation prior to the transaction. However, due to this, it will benefit each other ignoring the substantial interest of all the stakeholders.
Transactions with related parties need not always be disadvantageous. The concern arises only when there is abuse of a related party transaction on account of conflict of interest and non-arm’s length dealings which are beneficial to a related party but detrimental to other stake holders. Therefore, transparency in such transactions is essential in the interest of stakeholders and good corporate governance.
To develop the legal fabric in respect of RPTs, the necessary provisions are enshrined under the Companies Act, 2013
Who is a Related Party?
According to Section 2(76) of the Act, ‘related party’, with reference to a company, means
- A director or his relative,
- Key Managerial Personnel or his relative,
- A Firm in which companies director, manager, or relative is partner,
- A Private Company in which our companies director, manager, or relative is member or director in such private company,
- Any body corporate whose board of director, managing director, or manger is required act in accordance with the advice, directions or instructions of company’s director or manager,
But this condition will not be applicable, where directions are followed in professional capacity - Holding, Subsidiary or Associate of such company
- Any Company which is subsidiary of a holding company to which it is also a subsidiary
*Relative – with reference to any person, means any one who is related to another, if-
– they are members of Hindu Undivided Family;
-they are husband and wife; or
-one person is related to the other in such manner as may be prescribed
Legal Mechanism for Related Party Transactions
Related Transactions are not banned, they are regulated by section -188 of the Act, so that it can be disclosed to the board of directors or shareholders to ratify them. If the transactions are beyond the threshold limits, then it is required to be disclosed in General Meeting for approval by Special Resolution.
- The Act provides for approval of all transactions with related parties except with respect to transactions with a wholly owned subsidiary.
- Approval by the Board is necessary if the transaction with a related party is covered under Section 188(1) of the Act but does not exceed the thresholds under Rule 15(3) of the Companies (Meetings of the Board and its Powers) Rules, 2014.
However, approval of the shareholders is required in all cases where the transaction exceeds the thresholds referred to above. If the transaction is in the ordinary course of business and on arm’s length basis then approval of the Audit committee will be necessary (under section 177(4)(iv) of the Act) but approval of the Board is not necessary to be obtained. Further, he Act requires disclosure of related party transactions in the Directors’ Report.
Specified Contracts between a Company & Related Party which requires shareholder approval:-
| S. No. | Transactions | Threshold Limit |
| 1 | Sale, purchase or supply of any goods or materials | Amounting to 10% or more of Turnover of the company or Rs. 100 Crore, Whichever is Lower |
| 2 | Selling, buying property of any kind | Amounting to 10% or more of Net worth of the company or Rs. 100 Crore, Whichever is Lower |
| 3 | Leasing of property of any kind | Amounting to 10% or more of Net worth of the company or 10% or more of turnover of the Company or Rs. 100 Crore, Whichever is Lower |
| 4 | Availing or rendering of any services | Amounting to 10% or more of turnover of the company or Rs. 50 Crore, Whichever is Lower |
| 5 | Appointment of agent for purchase or sale of goods, materials, services or property | Amounting to 10% or more of turnover of the company or Rs. 100 Crore, Whichever is Lower |
| 6 | Appointment to any office or place of profit in the company, associate company, or subsidiary company | Exceeding Rs. 2,50,000/ – per month |
| 7 | Underwriting of securities or derivatives thereof, of the company | Exceeding 1% of Net Worth |
SEBI Governs Related Parties and Related Party Transactions
The SEBI Clause 49 also states certain regulatory requirements for related party transactions. It defines a related party transaction as a transaction that includes the transfer of resources/services/obligation.
Its scope is of a wider range than the Companies Act 2013. It includes close family members of directors or key managerial personnel, a private company in which directors or key managerial personnel plus their relatives have control or significant influence.
Every related party transaction which is material has to be approved by the shareholders by passing a special resolution and all related parties shall not be allowed to vote on such resolutions.
FAQs
What is a Related Party Transaction (RPT)?
A Related Party Transaction (RPT) refers to a transaction between a company and its related parties, such as directors, key managerial personnel (KMP), or their relatives, or entities where these individuals have significant influence or control. These transactions can include the sale or purchase of goods, services, assets, or leasing arrangements.
What is Section 188 of the Companies Act, 2013?
Section 188 of the Companies Act, 2013 regulates Related Party Transactions (RPTs). It specifies the conditions under which a company can enter into transactions with its related parties. The section outlines requirements for approval and disclosure of such transactions to ensure transparency and prevent misuse of power.