Related Party Transaction
A Related Party transaction (‘RPT’) is a business deal or arrangement between two parties who are joined by a special relationship prior to the deal. Section 188 (‘Section’) of the Companies Act, 2013 (‘Act’) places more reliance on disclosure with members’ approval rather than on regulatory approvals. The Section requires a company to obtain approval of the Board and of the members, in certain situations, prior to entering of any transaction or agreement with a related party.
I. Applicability of the Section
Section 188 is applicable to both Private and Public companies.
According to Section 2(76) of the Act, Related Party with reference to a company means:
- a Director 1or his relative;
- a Key Managerial Personnel 2 or his relative;
- a firm, in which a Director, Manager or his relative is a partner;
- a Private Company 3 in which a Director or Manager or his relative is a Member or Director;
- a Public Company 4 in which a Director or Manager is a Director and holds along with his relatives, more than two per cent of its paid-up share capital;
- any Body Corporate 5 whose Board of Directors, Managing Director or Manager is accustomed to act in accordance with the advice, directions or instructions of a Director or Manager;
- any person on whose advice, directions or instructions a Director or Manager is accustomed to act, except advice, directions or instructions given in a professional capacity;
- any company which is:
- a Holding, Subsidiary or an Associate company of such company;
- or a Subsidiary of a Holding Company to which it is also a Subsidiary;
- such other person as may be prescribed; 6
According to Section 2(77) of the Act, Relative means anyone who is related to another, if:
- they are members of a Hindu Undivided Family;
- they are husband and wife; or
- one person is related to the other in such manner as may be prescribed; 7
Rule 4 of Companies (Specification of Definition Details) Rules,2014 read with clause (77) of Section 2 of the Act, states that a person shall be deemed to be the relative of another, if he or she is related to another in the following manner:
- Father includes step-father.
- Mother includes step-mother.
- Son includes step-son.
- Son’s wife.
- Daughter’s husband.
- Brother includes step-brother
- Sister includes step-sister.
III. Related Party Transactions
IV. Approvals Required
- Board Approval- Rule 15(1) of Companies (Meetings of Board and its Powers) Rules, 2014 states the agenda of the Board meeting where the resolution is proposed to be passed considering the following:
- the name of the related party and nature of relationship;
- the nature, duration of the contract and particulars of the contract or arrangement;
- the material terms of the contract or arrangement including the value, if any;
- any advance paid or received for the contract or arrangement, if any;
- the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
- whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
- any other information relevant or important for the Board to take a decision on the proposed transaction.
- Shareholders approval– Rule 15(3) of Companies (Meetings of Board and its Powers) Rules, 2014 states that, except with the prior approval of the company by a resolution a company shall not enter into transaction(s).
Prior Approval of Company by Resolution required, if Transaction Value exceeds
|a)||Sale, purchase or supply of any goods or materials (directly or through appointment of agent)||Least of: 10 % of Turnover (or) Rs. 100 crores|
|b)||Selling or otherwise disposing of, or buying, property of any kind (directly or through appointment of agent)||Least of: 10 % of Net worth (or) Rs. 100 crores|
|c)||Leasing of property of any kind||Least of: 10 % of Turnover (or) 10 % of Net worth (or) Rs. 100 crores|
|d)||Availing or rendering of any services (directly or through appointment of agent)||Least of: 10 % of Turnover (or) Rs. 50 crores|
|e)||Appointment of any agent for purchase or sale of goods, materials, services or property||Appointment of Agents may pertain to RPTs in (a), (b), (d) above.|
|f)||Related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company||Monthly Remuneration > Rs. 2,50,000|
|g)||Underwriting the subscription of any securities or derivatives thereof, of the company||Remuneration for Underwriting > 1% of Net Worth|
- The requirement of passing the resolution shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval. 8
- The limits specified in points (a) to (d) shall apply to transaction(s) to be entered into either individually or taken together with the previous transactions during a financial year.
- The turnover or the net worth shall be computed on the basis of Audited Financial Statement of the preceding financial year.
- However, in case of wholly owned subsidiary, the resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between the wholly owned subsidiary and the holding company.
V. Disclosures in the Explanatory Statement:
- Name of the related party;
- Name of the director or key managerial personnel who is related, if any;
- Nature of relationship;
- Nature, material terms, monetary value and particulars of the contract or arrangement;
- Any other information relevant or important for the members to take a decision on the proposed resolution.
Restrictions on Voting
A member who is a related party shall not vote on such resolution to approve any contract or agreement. 11
Transactions in the ‘ordinary course of Business’ and at ‘Arm’s length basis’ are not covered under S.188(1).
VI. Office or place of profit:
Office or place of profit
|Held by Director||Held by an Individual, Firm, Private Company or Body Corporate|
|Remuneration received from the company over and above the remuneration he is entitled as a Director.||Received from the company anything by the way of remuneration, salary, fee, commission, perquisites, rent free accommodation.|
Every contracts or agreements entered shall be referred to the Board’s Report.
VII. Effect of Contravention
VIII. Violation Section 188
Type of company
Any other company
|Punishment||Imprisonment which may extend to 1 year or with minimum fine of Rs. 25,000 and maximum fine of Rs.5,00,000 or with both.||Minimum fine of Rs. 25,000 and maximum fine of Rs.5,00,000|
In case of a Private Company:
If a member is a Related Party, he shall not vote on such resolution to approve any contract or arrangement.
In case of Government Company:
A Government Company, other than a listed company, in respect of contracts or arrangements other than sale, purchase or supply of any goods or materials, where the company obtains approval of the Ministry or Department of the Central Government or State Government before entering into such contract or arrangement.
X. Related Party Transactions for listed companies: Regulation 23 of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (‘Regulation)
- Where contracts are entered into between two Government Companies.
- This regulation is effective from September 2, 2015 and shall be applicable to all prospective transactions. In case there is any material or substantial changes in terms and conditions of existing RPT that would be governed by the Regulation.
- It is mandatory for the listed company to formulate a policy on materiality of RPTs.
- RPTs shall require prior approval of Audit Committee.
- The Audit Committee may grant omnibus approval for RPTS.
- All Related Party must abstain from voting.
- However as per Section 188 of the Act, only the party to the contract is prohibited from voting.
- Existing RPT transaction must be placed in the first general meeting held after September 2012.
XI. Forms to be filed with the ROC:
|1.||Form AOC 2||
|2.||Form AOC 3||
|3.||Form AOC 4||
- Section 2(34) of the Act ↩
- Section 2(51) of the Act ↩
- Section 2(68) of the Act ↩
- Section 2(71) of the Act ↩
- Section 2(11) of the Act ↩
- Rule 3 of Companies (Specification of Definition Details) Rules,2014 – A Director other than an Independent Director or Key Managerial Personnel of the Holding Company or his relative with reference to a company, shall be deemed to be a related party. ↩
- Rule 4 of Companies (Specification of Definition Details) Rules,2014 ↩
- Proviso 4 of Section 188 of the Act ↩
- Section 2(49) of the Act ↩
- Rule 15(2) of Companies (Meetings of Board and its Powers) Rules, 2014 ↩
- Proviso 2 of Section 188(1) of the Act ↩