Related Party Transactions (RPTs) are one of the most important compliance areas under the Companies Act, 2013 and SEBI (LODR) Regulations, 2015. Determining the correct level of approval for an RPT often becomes confusing due to the involvement of multiple provisions, thresholds, exemptions and different applicability requirements for listed and unlisted companies.
This article provides a simplified and practical approval matrix covering:
- Audit Committee Approval
- Board Approval
- Shareholder Approval
- Material Related Party Transaction thresholds
- Important exemptions
The matrix attached below summarizes the approval requirements applicable to Related Party Transactions for both unlisted companies (Table 1) and listed Companies (Table 2) and in a simplified manner (If you need this as pdf or excel you can directly reach out to me at @acsvikassharma@gmail.com):
| Approval requirements of Related Party Transactions- for unlisted Companies | |||
| Transactions | Audit Committee Approval | Board approval | Shareholder Approval (Ordinary Resolution) |
| Any transaction other than transactions specified in Section 188(1). | Yes, Prior approval of audit committee is required for all transactions | No | No |
| Transactions specified in Section 188 (1) which are as follows:
(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 |
Yes | Yes, except when the transaction is in the ordinary course of business and on arm length basis | Shareholder Approval is only required if the value of transactions specified in Section 188(1) is exceed the following limits:
1. For Transaction specified in (a): 10% or more of the turnover of the Company. 2. For Transaction specified in (b): 10% or more of the Net worth of the Company. 3. For Transaction specified in (c): 10% or more of the turnover of the Company. 4. For Transaction specified in (d): 10% or more of the turnover of the Company. 5. For Transaction specified in (e): same limit for appointment of agent if transaction is done directly. 6. For Transaction specified in (f): remuneration exceeding 2.5 lakh Rs. Monthly. 7. For Transaction specified in (g): amount exceeding 1% of Net worth of the Company. |
Notes:
1. All RPTs to be approved by the Audit Committee whether it is a transaction specified in Section 188 or not.
2. OR is not required for the transaction entered between Holding company and wholly owned subsidiary Company.
3. In shareholder’s meeting, the member who is related party can’t vote except if 90 % or more of the members, in number, of the company are relative of promoter or related parties. (private companies exempted by circular dated 5 June, 2015).
4. Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.
5. Transaction between holding or subsidiary or associates of private companies are exempted by MCA circular dated 5 June, 2015.
6. Agenda of Board meeting in which RPT to be approved shall have the information specified in Rule 15.
| RPT Approval requirements – Listed Companies | ||
| S.No. | Approving Authority | Transactions |
| 1 | Audit Committee Approval | All transactions (without any limit) require prior approval of Audit committee.
Explanation: any kind of transaction having any amount requires prior approval of audit committee whether it is a transaction specified in section 188 (1) of Companies act, 2013 or not and whether it is material transaction or not. Except in the following cases: 1. Remuneration and sitting fees paid to Director, KMP or senior management other than promoter or promoter Group provided that the same is not material. 2. Transaction between Holding Company and Wholly owned subsidiary Companies. 3. Transaction between two wholly owned subsidiaries of Listed holding company. 4. Transaction by Public sector company with Central or state government. 5. Transaction in the nature of payment of statutory dues, fees or charges to the Central or state Government. 6. Transactions between two public sector companies. |
| 2 | Board Approval | Transaction Specified in Section 188(1) of Companies Act, 2013(7 Items) Except if the transaction is in the ordinary course of business and on arm length basis. |
| 3 | Shareholder Approval (Ordinary Resolution) | The Shareholder’s approval by way of Ordinary resolution is required in the following cases:
1. If the transaction value exceeds the limits specified in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014. (as defined in previous sheet) 2. If the transaction is a material Transactions as defined in Regulation 23 of SEBI (LODR) Regulations, 2015 read with Schedule XII. |
What is Material Transaction? (as per Regulation 23 of SEBI (LODR) Regulations, 2015 read with Schedule XII.)
| 1. | FOR LISTED ENTITIES OTHER THAN SME LISTED COMPANIES | |
| Consolidated turnover of the listed entity | Threshold | |
| upto Rs. 20,000 Crore | 10% of the consolidated turnover of the listed entity | |
| more than Rs. 20,000 Crore to upto Rs. 40,000 Crore | Rs. 2000 Crore + 5% of the annual consolidated turnover of the listed entity above Rs. 20,000 Crore | |
| More than Rs. 40,000 Crore | Rs. 3000 Crores + 2.5% of the annual consolidated turnover of the listed entity above Rs. 40,000 Crores or Rs. 5000 Crores, whichever is lover | |
| 2. | FOR SME LISTED COMPANIES | |
| If the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds rupees 50 crore or 10 % of the annual consolidated turnover of the listed entity as per the last audited financial statement of the listed entity whichever is lower. | ||
| 3. | If payment is related to brand usage or royalty then it shall be considered material if the transaction to be entered into individually or taken together with previous transactions during a financial year, exceed 5% of the annual consolidated turnover of the listed entity. | |
Notes:
1. Only those members of Audit Committee who are Independent Directors shall approve Related Party Transaction.
2. In case of Shareholder’s resolution, no related party shall vote to approve the Related Party Transactions.
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Authors Bio: This Article is prepared by CS Vikas Sharma a Qualified Company Secretary specialising in SEBI Regulations, Listing Compliances, Corporate Governance and Companies Act matters. The author is actively involved in handling compliance and secretarial matters relating to listed entities and corporate laws. You can reach out to author for any query related to Related Party transactions approval requirements or other Company and SEBI laws matters via mail at acsvikassharma@gmail.com.
Author Bio
