Related Party Transactions | Companies Act, 2013 | SEBI (LODR) Regulations, 2015

♦ Companies incorporated under the Companies Act, 2013

♦ Listed Companies having Paid-up share capital of more than ten crore or net worth of Rupees more than Twenty-Five Crore. (The listed entity to which provisions of Corporate Governance are applicable)

It may be noted that Regulation 23 of SEBI LODR governing Related Party Transaction shall not apply to listed companies not qualifying above criteria. Therefore, such a company shall follow provisions of Section 188 of Companies Act, 2013.

Transactions specified in Section 188(1) entered by a company with the following persons shall be construed as a Related Party Transaction:

1. Director of a company

2. Relatives of Director

3. A KMP as defined in Section 2(51)

4. Relative of KMP

5.  Firm in which director or manager is a partner

6. Firm in which Relative of director or manager is a partner

7. A private company in which director or manager is a member or director

8. A Private company in which relative of director or manager is a member or director.

9. a public company in which a director or manager is a director and holds along with his relatives, more than two percent of its paid-up share capital;

It may be noted that if a director or manager does not hold shares in a company then the transaction with such company shall not be considered as Related Party Transaction.

10. 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;

11. any person on whose advice, directions or instructions a director or manager is accustomed to act

e.g. If ABC Ltd and XYZ Ltd enters into a Shareholders agreement where ABC Ltd has more than 50 percent voting rights in all matters passed in the general meeting of XYZ Ltd. For XYZ Ltd every transaction entered into with the ABC Ltd is a Related Party Transaction and vice versa.

Exception to point 11:

Where a Body Corporate is giving advisory to a company then in such case transaction with body corporate shall not be considered as a RPT.

12. Holding, Subsidiary or Associate of the company

13. Sister concern of the company

14. Company which holds more than 20 per cent voting powers (or participation in business decision) in the Company.

As per the amended SEBI LODR, effective from 7^th September 2021, the Related Party shall include any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed shall b deemed to be a related party.

Exception:

However, exception has been provided for the units of Mutual Fund which are listed on the Stock Exchange.

Two persons are said to be relative, if—

(i) they are members of a Hindu Undivided Family;

(ii) they are husband and wife; or

(iii) one person is related to the other in any of the following manner:

Father (including step father)

Mother (including step mother)

Son (including step son)

Son’s wife

Daughter (does not include Step Daughter)

Daughter’s husband

Brother (including step brother)

Sister (including step sister)

Exception

However, exception has been provided for the units of Mutual Fund which are listed on the Stock Exchange.

• sale, purchase or supply of any goods or materials
• selling or otherwise disposing of, or buying, property of any kind
• leasing of property of any kind
• availing or rendering of any services
• appointment of any agent for purchase or sale of goods, materials, services, or property
• such related party’s appointment to any office or place of profit in the company, it’s a subsidiary company or associate company
• underwriting the subscription of any securities or derivatives thereof, of the company

The above transactions shall require approval of the Board.

Further, certain transactions exceeding limits given in Rule 15 of Companies (Meeting of Board and its Power), Rules, 2014 shall require prior approval by Ordinary Resolution passed in the general meeting of the members.

It may be noted that here the scope of the related party is not limited to the transactions given in the Companies Act. Any transaction between a listed entity and a related party as defined in Regulation 2(zb) shall be construed as a related party transaction. Also, the concept of arm’s length basis transaction does not seem to exist in the LODR as all transactions with the related parties are considered as related party transactions.

Exception:

However, exception has been made for the units of Mutual Fund which are listed on the Stock Exchange.

Note:

a. Limits prescribed above shall be calculated for transactions individually or taken together with the previous transactions during the FY.

b. turnover or net worth shall be computed on the basis of the audited financial statement of the preceding financial year.

All transactions, individually or taken together with previous transactions during the FY, with related parties exceeding 10 percent of the annual consolidated turnover as per the latest audited financial statements, shall be considered as Material Related Party Transaction.

Exception:

Payment made to related party with respect to brand usage or royalty shall be considered as material if the payment exceeds the limit of five percent the annual consolidated turnover as per the latest audited financial statements. Effective from July 9, 2019

♦ Transactions with related parties in the ordinary course of business at arm’s length basis shall not require approval of Board or Shareholders.

♦ Any transaction with a Wholly owned Subsidiary of the Company shall not require prior approval of members by an Ordinary Resolution.

However, approval of Board in the Board Meeting is necessary to carry out such transactions.

♦ Any transaction with a Wholly-owned Subsidiary of the Company shall not require prior approval of members by an Ordinary Resolution.

However, approval of Board in the Board Meeting is necessary to carry out such transactions.

Exception:

Related Party is allowed to vote on such transactions where ninety percent of members are related to promoters or related party to transaction.

Here the scope of the provision is wider than that of provisions of the Companies Act, 2013.

Also, any modification to the RTPs previously approved by the Audit Committee shall mandatorily be re-approved by the Audit Committee.

Only the members who are Independent Directors shall approve the Related Party Transactions. Effective from January 1, 2022.

(a) repetitiveness of the transactions (in past or in future);

(b) justification for the need for omnibus approval.

The omnibus approval shall be valid for one year.

(a) the criteria for granting the omnibus approval shall be in line with the policy prepared by the Company on related party transactions

(b) Nature of transaction shall be repetitive.

(c) omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year.

The audit Committee shall review related party transactions on a quarterly basis.

(a) name of the related party;

(b) name of the director or key managerial personnel who is related, if any;

(c) nature of the relationship;

(d) nature, material terms, monetary value, and particulars of the contract or arrangements;

(e) any other information relevant or important for the members to take a decision on the proposed resolution.

If the transaction is not ratified by the Board/Members then such transaction shall be voidable at the option of the Board or the shareholders.

The concerned director shall indemnify the loss caused to the Company in case the transaction is not ratified by the Board/Shareholder.

♦ policy on dealing with related party transactions

♦ Disclosure of Related Party Transactions made to Stock Exchange as required under Reg 23(9).

The policy shall include the clear threshold approved by the Board. Effective from

Also, the policy shall be reviewed by the Board at least once every three years.