Related party transaction

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AN ANALYTICAL STUDY OF
RELATED PARTY TRANSACTIONS
UNDER PROVISIONS OF
COMPANIES ACT, 2013
IN LINE WITH
RECENT AMENDMENTS NOTIFIED BY THE
MINISTRY OF CORPORATE AFFAIRS
Compilation & Interpretation:
Sabareeswar T
Company Secretary
SPL- Group- Chennai
Coordinates:
Email: sabareeswarcsi@gmail.com
Mob: +91 96455 44074

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TABLE OF CONTENTS
Contents Page No
❖ Preface……………………………………………………………………………………………………… 3
❖ Reference sections and rules …………………………………………… 4
❖ Concept of Related Party………………………………………………………… 5
❖ Concept of Relatives…………………………………………………………………… 6
❖ Concept of Related Party Transactions……………………… 6
❖ Approvals………………………………………………………………………………………………… 9
❖ Documentation……………………………………………………………………………………… 12
❖ Process Flow………………………………………………………………………………………… 13
❖ Role of Audit Committee & omnibus approval of
RPTs………………………………………………………………………………………………………………
14
❖ Penal Provisions……………………………………………………………………………… 16
❖ Exemptions granted to private and government
companies…………………………………………………………………………………………………
17
❖ Conclusion……………………………………………………………………………………………… 18

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❖ PREFACE
Provisions of related party transactions are one of the key
areas of the Companies Act which are discussed, analyzed and
deliberated upon by experts in various avenues and professional
platforms. The reason behind the importance of this provision
is the triggering event associated with the section which is so
fragile that the provisions and compliance requirement gets
activated very easily and frequently due to the coverage and
scope of the definition.
Majority of the private companies getting registered in India
are family owned businesses where the family members themselves
hold shares and directorship in the Company. Such businesses
usually have numerous transactions with related parties. Due to
the complexity involved, there are high chances of deviation
from the norms and possible violations by such enterprises.
The reason why the provisions are so complex and sophisticated
is due to the improper placement of provisions and rules which
are scattered across the entire act combined by frequent
amendment of the legislation.
Given a transaction, for analyzing the compliance requirements,
all the sections and rules should be read together with the
notifications, amendments, exemptions and clarifications issued
by the ministry from time to time which in turn expands its
horizon for interpretation.
Therefore, the RPT provisions facilitate ample scope to
professionals for rendering advisory services and legal opinions
due to the above stated reasons.
This article is an attempt to bring together the relevant
provisions of the Act so that the reader will have a holistic
idea of the dos and don’ts before initiating a related party
transaction. Therefore, the readers are advised to view this
article solely from Companies Act perspective. Guidelines,
regulations and directives of other regulators like SEBI, RBI,
Dept of Public Enterprises etc., are not considered in this
article.

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❖ REFERENCE SECTIONS & RULES
1. Sections referred in Companies Act-
a) Section 2(76)
b) Section 2(77)
c) Section 134(3)(h)
d) Section 177(4)(iv)
e) Section 184(2)
f) Section 188
g) Section 189(1)
2. Rules referred in Companies Act-
a) Rule 6- Companies (Meeting of Board & its Powers) Rules,
2014
b) Rule 6A- Companies (Meeting of Board & its Powers)
Rules, 2014
c) Rule 15- Companies (Meeting of Board & its Powers)
Rules, 2014
d) Rule 16- Companies (Meeting of Board & its Powers)
Rules, 2014
e) Rule 4 of the Companies (Appointment and Qualification
of Directors) Rules, 2014
f) Companies (Specification of Definitions Details) Rules,
2014
g) Rule 8- Companies (Accounts)Rules, 2014
3. Other statutes referred-
a) Section 2(h) of Securities Contract (Regulations) Act,
1956

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❖ WHO IS A RELATED PARTY?
When it comes to related party compliance, listing out all
related parties should be the primary task. So how do you list
out the related parties?
Section 2(76) defines 7 categories of related parties. They are:
i. A Director or his relative
ii. A KMP or his relative
iii. A firm where the Director/Manager or his relative is a
partner.
iv. A Private Company in which the Director/Manager or his
relative is a Member/ Director
v. A Public Company in which the Director/ Manager is a
Director AND holds along with his relatives more than 2%
of the paid-up capital.
Explanation: In case of public companies, 2 conditions
should be satisfied i.e. firstly the Director or Manager
should be a Director in the public company and secondly,
the shareholding of the [Director/Manager + the relative]
should hold more than 2% of the paid-up capital of that
Company.
vi. A Body Corporate in which the Board of Directors or Managing
Director or the Manager is accustomed to act according the
instruction of the Director/ Manager.
vii. Any person on whose advice the Director/ Manager is
accustomed to act.
Pertaining to vi & vii, if an advice/ instruction/
direction is given in a professional capacity, then it
does not come under the ambit of this definition.
RELATED PARTY AT A GLANCE
Related
Party
Director or his relative KMP or his relative
A Private
Company in
which the
Director/
Manager is a
Member/
Director
A Public Co in whcih the
Director/ Manger is a Director &
holds along with his relatives >
2% of Paid-Up Capital
Any person on whose advice the
Director/ Manager is accustomed to
act
A Body
Corporate whose
Board of
Directors,
Managing
Director/
Manager is
accustomed to
act in
accordance with
the advise,
directions or
instructions of
a Director/
Manager
A firm in which the
Director/ Manager/
Relatives is a
partner

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❖ WHO IS A RELATIVE?
The second step involved listing out the relatives of the Related
Parties. So, who are relatives? The term relative is defined in
Section 2(77) and under Rule 3 of the Companies (Specification
of Definition Details) Rules, 2014.
❖ WHAT ARE RELATED PARTY TRANSACTIONS?
If the Company proposes to enter into a transaction with any
related party or relatives mentioned in (I) or (II) listed above,
the Companies Act requires the Company to obtain approval from
the Board of Directors and in some cases, from the Shareholders
on the basis of value of transaction which will be discussed in
the approval section of this article.
Let us analyze what transactions will be construed as a Related
Party Transaction (RPT).
Relative
Members of HUF
Husband & Wife
A person shall be deemed to be relative if he/ she
is related to another in the following manner:
1. Father (incl Step Father)
2. Mother (incl Step Mother)
3. Son (incl Step Son)
4. Daughter
5. Brother (incl Step Brother)
6. Sister (incl Step Sister)
7. Son's Wife
8. Daughter's Husband

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Section 188(1) lists out various transactions, if entered with
a related party, will be construes as an RPT. They are:
Notes:
*Place of profit explained >>
RelatedParty
Transactions
Sale, purchase or supply of any
goods or materials
Leasing of property of any kind
Availing/ Rendering any services
Appoinment of related party to
any office/ place of profit*
in:
1. The Company
2. Subsidiary**
3. Associate Company***
Appointing related
party to underwrite the
subscription of any
securities# or
derivatives
Appointment as agent for
purchase/ sale of goods/
materials/ services/ property
Selling/ dispossing off/
buying property of any
kind
PLACE OF PROFIT
means:
Any office or
place held by:
Director
If he receives any extra
remuneration (above what
is entitled) like
salary/ fee/ commission/
perquisites/ rent-free
accomodation
Individual(not a
Director)/ Firm/
Private Company/ Body
Corporate
Received from company
any remuneration/
accomodation

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**Subsidiary Company Explained >>
*** Associate Company Explained >>
An Associate Company means a company in which the other company
has a control of more than 20% of equity shares or control or
participation in business decisions under an agreement which
includes a joint venture.
# Securities Explained >>
Securities have the same meaning as per the definition provided
in 2(h) of the Securities Contract (Regulations) Act, 1956 which
includes shares, scrips, stocks, bonds, debentures, debenture
stock or other marketable securities of a like nature of any
incorporated company or body corporate.
PLACE OF PROFIT
means:
Any office or
place held by:
Director
If he receives any extra
remuneration (above what
is entitled) like
accomodation
Individual(not a
Director)/ Firm/
Private Company/ Body
Corporate
Received from company
any remuneration/
accomodation

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❖ APPROVALS
SL
No
Transaction When to seek approval of
Board Members
I. Contracts/
Arrangements for:
a. Sale/ purchase/
supply of any
goods/ materials
directly/ through
agents
Only Board approval
required.
Limits for Member’s
approval omitted by
the Companies
(Meetings of Board
and its Powers)
Second Amendment
Rules, 2019 Dated
18th November, 2019
-
b. Selling/
disposing off/
buying property
directly/ through
agents
c. Availing/
rendering any
services
directly/ through
agents
d. Leasing property
of any kind
Less than 10% of
turnover
More than 10% of
turnover
II. Appointment to
any office or
place of profit,
its subsidiary/
associate
Monthly
remuneration less
than Rs. 2.50 lakhs
Monthly
remuneration more
than Rs.2.50
lakhs
III. Underwriting the
subscription of
securities/
derivatives
Remuneration less
than 1% of net
worth*
Remuneration more
than 1% of net
worth*
IV. Contents to be
included while
seeking approval
Agenda of the Board
Meeting should
disclose:
✓ Name of the
related party and
nature of
relationship.
✓ Nature, duration
of contract and
particulars of
The explanatory
statement should
contain the
following
details:
✓ Name of related
party
✓ Name of related
Director/ KMP
✓ Nature of
relationship

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contract/
arrangement.
✓ Material terms
incl value
✓ Advance paid/
received
✓ Manner of
determining
pricing and
commercial terms
✓ Whether all
factors relevant
to the contract
were considered,
if not,
justification
thereof.
✓ Nature,
material
terms,
monetary
value,
particulars of
contract/
arrangement
*computed based on the audited financial statements of the preceding financial
statements
Points to remember >>
o In case of wholly owned subsidiary, the resolution passed by
the holding company will suffice for entering into
transaction between wholly owned subsidiary and holding
company.
o Also, member’s approval may not be sought for transactions
between holding and wholly owned subsidiary whose accounts
get consolidated.
o While seeking approval, the related director should not be
present during discussions and no related members shall vote
on the resolution seeking approval of members. In case, 90%
(in number) or more of the members are relatives of
promoter/related parties, such members may vote on the
resolution.
o Where companies are required to constitute an Audit
Committee under Section 177, all related party transactions
should be approved and recommended by the Committee
NOTHING IN SECTION 188(1) WILL APPLY IN THOSE TRANSACTIONS
WHICH ARE UNDERTAKEN IN THE ORDINARY COURSE OF BUSINESS AT
ARM’S LENGTH BASIS$

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$ What is an Arm’s Length Transaction?
Arm’s Length Transaction means a transaction between two related
parties that is conducted as if they are unrelated.
Example >>
Company A and Company B are companies having holding-subsidiary
relationship, involved in the business of automobile
manufacturing. Company B manufacture and supply tyres to holding
company A at the rate of Rs.1,500/- per unit. Assuming there is
an unrelated tyre manufacturer- Company C, selling similar tyres
(in terms of quality and dimensions) to other automobile
manufactures or Company A itself at the rate of Rs.2,400/- per
unit. So, the transaction between A and B will not qualify arm’s
length criteria since Company B is supplying the product at
discounted value due to the relationship existing between A and
B. Had Company B been supplying the product at a price comparable
to what Company C had been selling, the transaction would have
qualified the arm’s length criteria.

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❖ DISCLOSURES & DOCUMENTATION
i. All related party transaction shall be mentioned in the Board’s
Report of the Company along with the justifications for entering
into such contract(s). The requirement if such a disclosure is
envisaged in Section 134(3)(g) of the Companies Act, 2013.
ii. In the Board’s Report, the related party transactions shall be
mentioned in a prescribed format called AOC-2 prescribed in Rule
8 of the Companies (Accounts) Rules, 2014.
iii. Every interested Director should disclose the nature of interest
at the Board Meeting discussing the contract/ arrangement.
iv. The details of the related party transactions should be updated
in the Register of Contracts with Related Parties (Form MBP-4)
which should be placed before the ensuing meeting of Board of
Directors and the Act requires the register to be signed by all
Directors present in the meeting. The register should be
maintained in the registered office of the Company open to
inspection of Members of the Company. The register should be
placed at all AGMs. However, in case of a contract/ arrangement
for a value of sale/ supply of any goods, material or services
less than Rs. 5 lakhs in a year, may not be entered in the
register.

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❖ PROCESS FLOW
Company proposes for a
transaction/ execution of
a contract
With a Related Party/
Relative u/s 2(76)
With an Unrelated Party
Falling under the
definition of RPT u/s
188(1)
End of Process
NO
NO
YES
YES
Leasing property of any
kind > 10% of T.O
Appointment to any
office or place of
profit, its subsidiary/
associate at monthly
remuneration > Rs. 2.5
lakhs
Underwriting the
subscription of
securities/
derivatives at a
remuneration more than
1% of net worth
Sale/ purchase/ supply
of any goods/
materials directly/
through agents
Selling/ disposing
off/ buying property
directly/ through
agents
Availing/ rendering any
services directly/
through agents
Leasing property of any
kind < 10% of T.O
Appointment to any
office or place of
profit, its subsidiary/
associate at monthly
remuneration < Rs. 2.5
lakhs
Underwriting the
subscription of
securities/
derivatives at a
remuneration less than
1% of net worth
Seek Board Approval
Seek Shareholder’s
Approval
Disclose the same in
Board’s Report in Form
AOC-2
Director to disclose
the nature of interest
in the Board Meeting
discussing the
contract/ arrangement
Maintain and update
Register (MBP-4) at
the Registered Office
Seek Audit Committee
Approval, if Company is
required to constitute an
Audit Committee

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❖ ROLE OF AUDIT COMMITTEE & OMNIBUS APPROVAL OF RPTs
If an Audit Committee is constituted under provisions of the
Act, all proposals of related party transactions and
modification of terms of existing transactions should get the
clearance and recommendation of Audit Committee.
Audit Committee Constitution >>
We must go through two rules to solve the riddle. Section 177
will point its arm towards Rule 6 of Companies (Meeting of Board
and its Powers) Rules, 2014 and Rule 6 will in turn take you to
Rule 4 of the Companies (Appointment and Qualification of
Directors) Rules, 2014 where the answer lies.
So, Rule 4 talks about the following classes of companies to
constitute an Audit Committee:
Audit
Committee
Listed Companies
Public companies with paid-up capital
> 10 crore
Public companies with TO > 100 crore
Public companies with aggregate loans/
debentures/ deposits > 50 crore

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Omnibus approval of RPTs >>
o Assuming the company is having related party transactions of
recurring nature. In such cases, rather than seeking approval
on a transaction-transaction basis, Rule 6A of the Companies
(Meeting of Board & its Powers) Rules, 2014 permits omnibus
approval with a validity of 1 year.
Example >>
Company A and B are holding and subsidiary company. The
subsidiary company B is using the premises of the holding
company A for business operations to which B pays a monthly
rent of Rs.1 lakh per month. In such a case, B may take an
omnibus approval of Rs.12 lakhs (or the company may even set
a higher value) in a year rather than seeking RPT approval on
a monthly basis thereby streamlining the process.
o Suppose, the company is unsure about the value and periodicity
of the transaction, in such cases, the rule permits omnibus
approval by Audit Committee for a value not exceeding Rs. 1
crore per transaction.
o The criteria of omnibus approval should be fixed in consultation
with the Board of Directors which includes:
a. Maximum aggregate value of transaction allowed under
omnibus approval in a year.
b. Maximum value per transaction
c. Disclosures to be made to Audit Committee while seeking
omnibus approval
d. Periodicity of review of transactions approved by Audit
Committee under omnibus route.
e. Transactions not permitted under omnibus approval route.
o All omnibus approval should contain the following details:
Note >> Omnibus approval not permitted for transactions pertaining to
selling or disposing off undertaking of the company.
Omnibus
Approval
Name of related
parties
Maximum value of
transaction
Other relavant
information
Indicative base
price/ current
contracted price and
formula for variation
in price Nature and
duration of
transaction

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❖ PENAL PROVISIONS
The penalty for violation of provisions is applicable to all
Directors or employees >>
Listed Companies
▪ Imprisonment up to 1 year
▪ Fine up between Rs 25
thousand and 5 lakhs
▪ Or both
Other Companies
▪ Fine up between Rs 25
thousand

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❖ EXEMPTIONS TO PRIVATE COMPANIES AND GOVERNMENT COMPANIES
SL
No
Private Companies Government Companies
1. Second proviso to
Section 188(1) does not
apply to private
companies. i.e.
Interested members are
permitted to vote for a
resolution seeking
approval of RPTs.
First and second proviso to
Section 188(1) does not apply
to government companies
entering into contract with
another government company or
unlisted government companies
if entering into contract with
another company and has
obtained the approval of the
Ministry governing the affairs
of the company
(i.e. provision requiring
shareholders’ approval for
transactions crossing the
threshold limits discussed in
the approval section of this
article and restriction on
voting by interested members)
2. Section 184(2) does not
apply to private
companies. i.e.
i.e. Interested Director
may participate in the
meeting seeking approval
of RPT after submitting
disclosure of interest.
-

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❖ CONCLUSION
All the stakeholders including the Board of Directors, Senior
Management and Members should be apprised and educated about the
compliance needs of related party transactions under the Act
which will enable them to take informed decisions which will in
turn narrow down the probability of a possible deviation from
the regulatory norms and procedures thereby facilitating better
corporate governance and practices.
DISCLAIMER
Due care and all possible steps have been taken to ensure the
content of this document is both current and accurate. However,
errors may occur. The contents are compiled based on the recent
circulars/ notifications issued by the Ministry of Corporate
Affairs which are subject to amendments. The views expressed
in this article are those of the author’s which is solely
intended for educational and informational purpose only and
must not be construed as a legal opinion/ advice. No
transaction should be initiated based on the views expressed
this article and legal opinion should be sought before
initiation of such tranasactions.

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