Dhruv Khandelwal
dhruv-khandelwal

Article Discusses Related Party Transactions under Companies Act, 2013 and SEBI LODR Regulations, 2015. It Explains who is Related Party, What is a related party transaction, Related Party Transaction requiring Audit Committee  Approval, Related Party Transaction requiring Board/Shareholders’ Approval and Related Party Transactions which are not in Ordinary Course of Business and Arm’s Length Basis.

WHO IS A RELATED PARTY?

As per Companies Act, 2013 and SEBI (LODR) Regulations, 2015

“Related party”, with reference to a company, means— “Relative”, with reference to any person, means any one who is related to another, if—
(i) a director or his relative; (i) they are members of a Hindu Undivided Family;
(ii) a key managerial personnel or his relative; (ii) they are husband and wife; or
(iii) a firm, in which a director, manager or his relative is a partner; (iii) A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:-
(iv) a private company in which a director or manager or his relative is a member or director; (1) Father:
Provided that the term “Father” includes step-father.
(v) a 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; (2) Mother:
Provided that the term “Mother” includes the step-mother.
(vi) any 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; (3) Son:
Provided that the term “Son” includes the step-son.
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act: (4) Son’s wife.
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity; (5) Daughter.
(viii) any company which is— (6) Daughter’s husband.
(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 subsidiary;
(7) Brother:
Provided that the term “Brother” includes the step-brother;
(ix) 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. (8) Sister:
Provided that the term “Sister” includes the step-sister.

 WHAT IS A RELATED PARTY TRANSACTION?

As per Companies Act, 2013 As per SEBI (LODR) Regulations, 2015
(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:
Related party transaction means transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract.

 AUDIT COMMITTEE APPROVAL REQUIRED FOR ALL RELATED PARTY TRANSACTIONS

Approval from Audit Committee for all Related Party Transactions (Both Companies Act, 2013 & SEBI (LODR) Regulations, 2015 are on the same lines)
All related party transactions shall require approval of the Audit Committee irrespective of the fact whether transactions entered into by the company are in ordinary course of business and on an arm’s length basis.
The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval. Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may make omnibus approval for such transactions subject to a maximum of rupees one crore per transaction.  
The audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given. (LODR)
Omnibus approval shall be valid for a period not exceeding one financial year and shall require fresh approval after the expiry of such financial year.
Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

BOARD/SHAREHOLDERS’ APPROVAL REQUIRED FOR RELATED PARTY TRANSACTIONS

Nature of transaction As per Companies Act, 2013 As per SEBI (LODR) Regulations, 2015
Transactions which are entered into by the company in its ordinary course of business and on an arm’s length basis. Following transactions are not required to be taken to the Board/Shareholders for their approval: However, LODR states that all material related party transactions irrespective of the fact whether transactions entered into by the company are in ordinary course of business and on an arm’s length basis, shall require approval of the shareholders through an ordinary resolution and the related parties shall abstain from voting on such resolutions whether the entity is a related party to the particular transaction or not.
a)    transactions which are entered into by the company in its ordinary course of business and on an arm’s length basis.
b)    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- A transaction with a related party shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds ten percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.
Transactions which are not in ordinary course of business and arm’s length basis. Explained in the table below The above said provisions shall not be applicable in the following cases:
(a) transactions entered into between two government companies;
(b) 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.

 RELATED PARTY TRANSACTIONS WHICH ARE NOT IN ORDINARY COURSE OF BUSINESS AND ARM’S LENGTH BASIS

S. No. Related party transactions which are not in ordinary course of business and arm’s length basis Board approval Shareholders’ approval by way of an ordinary resolution, if
a) sale, purchase or supply of any goods or materials Required sale, purchase or supply of any goods or material, directly or through appointment of agent, exceeding ten percent of the turnover of the company or rupees one hundred crore, whichever is lower
b) selling or otherwise disposing of, or buying, property of any kind Required selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, exceeding ten percent of net worth of the company or rupees one hundred crore, whichever is lower
c) leasing of property of any kind Required leasing of property any kind exceeding ten percent of the turnover of the company or rupees one hundred crore, whichever is lower
d) availing or rendering of any services Required availing or rendering of any services, directly or through appointment of agent, exceeding ten percent of the turnover of the company or rupees fifty crore, whichever is lower
e) appointment of any agent for purchase or sale of goods, materials, services or property Required sale, purchase or supply of any goods or material, directly or through appointment of agent, exceeding ten percent. of the turnover of the company or rupees one hundred crore, whichever is lower
availing or rendering of any services, directly or through appointment of agent, exceeding ten percent of the turnover of the company or rupees fifty crore, whichever is lower
selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, exceeding ten percent of net worth of the company or rupees one hundred crore, whichever is lower
f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company Required for appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and a half lakh rupees
g) underwriting the subscription of any securities or derivatives thereof, of the company Required for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding one percent of the net worth
NOTE 1: The turnover or net worth referred in the above table shall be computed on the basis of the audited financial statement of the preceding financial year.
NOTE 2: In case of wholly owned subsidiary, the resolution passed by the holding company shall be sufficient for the purpose of entering into the transaction between the wholly owned subsidiary and the holding company.

NOTE: Companies are also advised to refer AS 18 or IND AS 24, whichever is applicable to their respective entities.

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Category : Company Law (3196)
Type : Articles (12329) Featured (3992)
Tags : Companies Act (1673) Companies Act 2013 (1451) SEBI (476)

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