Related Party and its Transactions

Navneet Bathla 22 Dec 2019 6,135 Views 0 comment Print CA, CS, CMA | Articles

AS PER COMPANIES ACT, 2013

Who Is Related Party?

As per Section 2(76) Related party with reference to a company, 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 or manager is a director & holds along with his relatives, more than 2% of its paid-up share capital;
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 provided nothing shall be given in professional capacity;
Any person – on whose advice, directions or instructions a director or manager is accustomed to act provided nothing shall be given in professional capacity:

Who Is Relative?

As per Section 2(77) & Rule 4 of Chapter I Rules 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

What Are Related Party Transactions?

As per Section 188 of the Act & Rule 15 of Chapter XII Rules:

The Companies (Meetings of Board and its Powers) Rules, 2014

Company to enter into any contract or arrangement with a Related Party with respect to –

sale, purchase or supply of any goods or materials amounting to 10% or more of the Turnover of the Company;
selling or otherwise disposing of, or buying, property of any kind directly or through agent amount to 10% or more of Net Worth of the Company;
leasing of property of any kind amounting to 10% or more of Turnover of the Company;
availing or rendering of any services directly or through agent amounting to 10% or more of the Turnover of the Company;

Note: Limits specified in clauses (a) to (d) shall apply for transactions entered either individually or taken together with previous transactions during a Financial Year.

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, its subsidiary company or associate company at a monthly remuneration exceeding 2.5 lakh rupees; and
Underwriting the subscription of any securities or derivatives thereof, of the company exceeding 1 % of Net Worth

Note : Turnover or Net Worth referred in the above sub rules shall be computed on the basis of the Audited Financial Statement of the Preceding Financial Year.

Provisos:

Company may enter into contract or arrangement subject with the consent of Board of Directors and for the transactions with the related party as mentioned above, within prescribed limit, only when prior approval of the company shall be taken by the resolution.

Conditions To Be Fulfilled For Contract Or Arrangement With A Related Party

In case of Board Meeting

Agenda of Board Meeting at which resolution is to be proposed shall disclose:-

the name of the related party and nature of relationship;
the nature, duration and particulars of the contract or arrangement;
material terms of the contract or arrangement including the value, if any;
any advance paid or received for the contract or arrangement, if any;
manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
any other information relevant or important for the Board to take a decision on the proposed transaction.

In Case of General Meeting

Resolution to be passed by the Company at General Meeting for approving prescribed limit f related party transactions:

The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section 101 shall contain the following particulars, namely:-

(a) name of the related party;

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

(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.]

Note:

In case of Wholly Owned Subsidiary, resolution is passed by the holding company shall be sufficient for the purpose to enter into transaction between wholly owned subsidiary and Holding Company.

ARMS’S LENGTH BASIS

Arms Length means any transaction between two related parties that occur as if they are unrelated
Any transaction entered into ordinary course of business or on arm’s length basis shall not require any approval or consent of BOD or members
Please note Approval of Audit Committee is necessary

Role Of Audit Committee In Case Relating To Omnibus Approval For Related Party Transactions:-

Omnibus Approval taken and reviewed on Annual Basis
After obtaining approval of BOD, Audit Committee shall consider omnibus approval as mentioned in Rule 6A of Chapter XII The Companies(Meetings of Board and its Powers) Rules, 2014.
Shall be valid for only one financial year and shall require fresh approval after expiry of term
Shall be not made for transactions in respect of selling or disposing of undertaking of the company

Provisos:

Provided further that in case of transaction, other than transactions referred to in section 188, and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board:
Provided also that in case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it.

Disclosure In Board Report

Every contract or arrangement entered into under sub-section (1) of Section 188, shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.

Contravention

Where any contract or arrangement is entered, without obtaining the consent of the Board or approval by aresolution in the general meeting under sub-section (1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within 3 months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board or, as the case may be, of the shareholders and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

Penalty

Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall,—

in case of listed company – punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both; and
In case of any other company – punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

As Per SEBI (Listing Obligations And Disclosure Requirements) Regulations, 2015

Who Is Related Party?

As per Regulation 2(zb) Related Party means as defined under Section 2(76) of Companies Act, 2013 or under the applicable accounting standards:

Provisos:

Any person or entity belonging to Promoter or Promoter Group of Listed Entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a Related Party.
This Definition shall not be applicable for the units issued by mutual funds which are listed on recognised stock exchange(s)

Who Is Relative?

As per Regulation 2(zd) Relative means relative as defined under Section 2(77) of Companies Act 2013 and rules prescribed

Proviso:

This Definition shall not be applicable for the units issued by mutual funds which are listed on recognised stock exchange(s)

What Are Related Party Transactions?

As per Regulation 2(zc):-

Transfer of Resources
Services or obligations between Listed Entity and Related Party, regardless price is charged or not

Transaction with Related Party shall be construed to include a Single Transaction or group of Transactions in a Contract:

Provison:

This Definition shall not be applicable for the units issued by mutual funds which are listed on recognised stock exchange(s)

As per Regulation 23 of SEBI (LODR) 2015:

Listed Entity to formulate a policy on “MATERIALITY” and on dealing with Related Party Transactions

Provisos

it includes clear threshold limits duly approved by Board of Directors
Policy shall be reviewed by Board at least once in every 3 years

Material Related Party

Individual transaction or transaction together with previous transaction exceeds 10% of annual consolidated turnover
In case of Brand Usage and Royalty, Individual transaction or transaction together with previous transaction exceeds 5% of annual consolidated turnover (w.e.f 01.07.2019)
All Material RPT shall require approval of shareholders through resolution
No Related Party shall vote to approve its transactions

Role of Audit Committee:

All RPT shall require prior approval
Lay down criteria for granting omnibus approval in line with policy on Related Party Transactions of the Listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature and is in interest of entity
Review at least on quarterly basis and valid for 1 year.

Exemptions:

Transactions entered into two Government Companies
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.

Disclosure

The listed entity shall submit within 30 days from the date of publication of its standalone and consolidated financial results for the half year, disclosures of related party transactions on a consolidated basis, in the format specified in the relevant accounting standards for annual results to the stock exchanges and publish the same on its website.

Conclusion

Sr. No	Particulars	Companies Act 2013	SEBI LODR
1.	Related Party	As per Section 2(76)	As per Section 2(76) of CA 2013 and IND AS 24
2.	Related Party Transactions	As per Section 188	Transfer of resources, obligations and services whether price charged or not
3.	Materiality	As per Rule 15	Exceeds 10% of annual consolidated turnover
4	Who can Vote	Related Party that have entered into transaction	All RPT
5.	Role of Audit Committee	Review Annually	Review Quarterly
6.	Policy of Materiality	Not Applicable	As per Regulation 23
7.	Validity of Omnibus Approval	For 1 FY	1 year
8.	Exemption	NA	Transactions (a) Government companies (b) Between wholly owned subsidiaries and Holding Companies

{Reference: MCA Website //SEBI LODR//COMPANIES ACT 2013}

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