Related Party Transactions under Companies Act 2013
As the company is on peak and growth path, the involvement of various investors also begin to escalate. The stakeholder’s participation is another vital involvement in the company. Thus it is but obvious that the role of transparency emerges.it becomes prime for the companies to maintain utmost transparency in the overall company related disclosures. Companies Act, 2013 has taken topmost care to formulate frame legal provisions for exact financial disclosures by the company to the stakeholders and other investors. Related Party Transaction under Companies Act, 2013 is most important concept in conserving transparency. Lets get started with in dept topic of Related Party Transaction.
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1. Who is Relative?
As per Section 2(77) & Rule 4 of Chapter I Rules of the Companies Act, 2013, Relative is:
- Members of HUF
- Husband & Wife
- Father including Step Father
- Mother including Step Mother
- Son including Step Son & his wife
- Daughter & her Husband
- Brother including Step Brother
- Sister including Step sister
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2. Who is Related Party?
A Related Party in general means any person or entity that is closely related to reporting entity. Following are two conditions for being a related party-
Condition 1: When any person or a close member of that persons family is related to reporting entity and if that person has any significant influence or control of its key managerial personnel then he is a related party.
Condition 2: When any entity is related to reporting entity and is a parent, subsidiary, fellow subsidiary, associate, or joint venture of the reporting entity, or it is controlled, jointly controlled, or significantly influenced or managed by a person who is a related party.
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3.What is Related Party Transaction?
Simply, related party transaction means any transaction which takes place between two such persons or entity which has some prior connection with the reporting entity. In other words, a related party transaction means a deal or transaction between two such parties who has some pre-existing business relationship or a common interest.
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Sec 2(76) of Companies Act, 2013
As per Sec 2(76) of the Companies Related Party means-
- director or his relative;
- key managerial personnel or his relative;
- firm, in which a director, manager or his relative is a partner;
- Private company in which a director or manager [or his relative] is a member or director;
- Public company in which a director and manager is a director [and holds] along with his relatives, more than two per cent of its paid-up share capital;
- Body corporate 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:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
- any body corporate which is—
(A) a holding, subsidiary or an associate company of such company; or
(B) a subsidiary of a holding company to which it is also a subsidiasry; or
(C) an investing company or the venturer of the company.
such other person as may be prescribed;
Explanation. —For the purpose of this clause, “the investing company or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.
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4. Governing Legislation for Related Party Transaction
Basically the following legislations govern the Related Party Transaction-
- Companies Act, 2013
- SEBI (Listing Obligation and Disclosure Requirement) Regulation 2015)
- Accounting Standards
In this blog we shall discuss only about Related Party Transaction under Companies Act, 2013. Related Party Transaction in terms of SEBI and Accounting Standards shall be discussed in depth in our next article.
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5.Types of Related Party Transaction?
Normally Related Party Transaction are of following-
1. Transaction with Subsidiary, Associate or Joint Venture
A subsidiary company means a company which is a daughter company that is owned or controlled by another company.
Associate Company means a company that has significant control over other company. Significant control means atleast having 20% of control over the share capital of the company.
A joint venture means whereby two or more entities comes together to achieve a common aim for a certain period of time which may be longer or shorter depending upon the duration of the goal.
All transactions with such Subsidiary, Associate or Joint Venture shall be considered as Related Party Transaction
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2. Transactions with Directors, Relative of directors or KMP’s
In normal course of business, if there is any transaction between director or relative of director then it will be covered under Related Party Transaction.
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3.Transaction with relatives of reporting entity
Any Transaction which takes place between relative of any reporting entity then the same shall be covered under related party transaction.
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Related Party transactions as per sec 188 of the Companies Act, 2013
Sec 188 of the Companies Act, 2013, unless the company has opted the consent of board of directors by a resolution and subject to any such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to-
(a) sale, purchase or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods, materials, services or property;
(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
(g) underwriting the subscription of any securities or derivatives thereof, of the company:
Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution:
Provided further that no member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party:
Provided also that nothing contained in the second proviso shall apply to a company in which ninety percent or more members, in number, are relatives of promoters or are related parties:
Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.
Provided also that the requirement of passing the resolution under first proviso 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:
Explanation. — In this sub-section,
- the expression “office or place of profit” means any office or place—
- Where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
- Where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
- the expression “arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.
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7. Disclosure in Board Meeting
The company is under obligation to disclose all the contracts and arrangements entered by the company and termed as Related Party Transaction in the Boards Report along with justification for entering into such contracts.
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8. Threshold Limits for Related Party Transactions
The Related Party Transactions whereby prior approval of shareholders or members is required has some threshold limits under Companies Act, 2013.
| Sr No | Nature of Transaction | Threshold Limit |
| 1 | Sale, purchase or supply of any goods or materials, directly or through appointment of agent | 10% or more of turnover of the Company or Rs.100 Crore, whichever is lower. |
| 2 | Selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent | 10% or more of net worth of the Company or Rs.100 Crore, whichever is lower. |
| 3 | Leasing of property | 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 | Rendering or Availing of services, directly or through appointment of agent | 10% or more of turnover of the Company or Rs.50 Crore, whichever is lower |
| 5 | Such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company | More than Rs.2,50,000/- per month |
| 6 | remuneration for underwriting the subscription of any securities or derivatives of the company | More than 1% of net worth |
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9. Penalty:
Sec 188 of the Companies Act, 2013 has strict penal provisions for contravention of sec 188 of Companies Act, 2013-
For Directors or any employee in default
A. Listed Company
Imprisonment – Maximum 1 Year months; and/or
Fine – Minimum Rs. 25,000/- and Maximum Rs. 5 Lakhs.
B. Other than Listed Company
Fine – Minimum Rs. 25,000/- and Maximum Rs. 5 Lakhs.
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