One of the most discussed and confusing provision of The Companies Act, 2013 is related party transaction. From time to time, a company avails the services or gives services to the persons who are at management of company.
To protect members and stakeholders of the company, the companies Act, 2013 governs the related party transaction from the undue advantage of their position and control in company, which can be taken by the persons operating a company. Afterall, a company is face but its operators are humans.
Lets go through its provision in a simple question and answer steps, in which I have tried the most common question related to related party transaction.
Page Contents
- What is related party transaction?
- What is/are related party?
- What transactions it covers?
- What section of Companies Act 2013 governs related party transaction?
- What are compliances related to related party transaction?
- What if company fails to comply with related party transaction?
- What is treatment of related party transaction in Accounting standard?
- What is the treatment of related party transaction under International Financial Reporting Standards (IFRS)?
A company entering into contracts and arrangements with related party as follows:
- 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, its subsidiary company or associate company; and
- underwriting the subscription of any securities or derivatives thereof, of the company.
A related party as per section 2(76) of The Companies Act, 2013, in reference to a company is:-
- a director or his relative;
- a Key Managerial Personnel or his relative;
- a firm, in which a director, manager or his relative is a partner;
- a private company in which a director or manager [or his relative] is a member or director;
- a public company in which a director or manager is a director [and holds] along with his relatives, more than two per cent 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;
- any person on whose advice, directions or instructions a director or manager is accustomed to act;
- any body corporate which is—
a. a holding, subsidiary or an associate company of such company;
b. a subsidiary of a holding company to which it is also a subsidiary; or
- an investing company or the venturer of the company;
Now, you must be thinking what is Key Managerial personnel, they are as following officers of the company:-
- the Chief Executive Officer or the managing director or the manager;
- the company secretary;
- the whole-time director;
- the Chief Financial Officer;
- such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board;
Note relative here means:- related to Director and Key Managerial Personnel as a member of the same HUF, husband, wife, father, step father, mother, step mother, son, step son, son’s wife, daughter, daughter’s husband, brother, step brother, sister, step sister.
What transactions it covers?
As covered in first question it covers, A company entering into contracts and arrangements with related party as follows:
- 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, its subsidiary company or associate company; and
- underwriting the subscription of any securities or derivatives thereof, of the company.
As per the Companies Act, 2013, all the related party transactions are covered under the section 188 and read with Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014.
Which companies are covered in the related party transaction?
All companies are covered under this section, whether: –
- Public Company
- Private Company
- One person Company
- Section 8 Company, etc.
However, note that as per vide notification No. G.S.R. 464(E) dated: 5th June, 2015 a member who is related party with whom a company is going to enter into contract or arrangement can vote in the voting of such resolution.
The Compliances are very simple, its entering into contract lawfully and filling of E-form MGT-14 along with relevant attachment with the Ministry of Corporate Affairs within a period of thirty days from the date of passing Board Resolution or Special Resolution, as the case may be.
What are steps when a related party transaction has been done or about to take place in company?
We can divide related party transaction approval in two parts broadly:-
1. Requirement to pass Board Resolution Only
2. Requirement to take Approval from Members of the Company apart from Board of Company.
Lets us understand this in below simple manner, if transaction amount/value is within the limit then only Board Resolution and if exceeds the limits then take prior approval from members of the company by passing of Ordinary Resolution:-
| S.no. | Transaction | Limit |
| 1 | Sale, purchase or supply of any goods or material, directly or through appointment of agent | Ten (10) percent or more of the turnover of the company |
| 2 | selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent | Ten (10) percent or more] of net worth of the company |
| 3 | leasing of property any kind | Ten (10) per cent or more of the turnover of the company |
| 4 | availing or rendering of any services, directly or through appointment of agent | Ten (10) percent or more] of the turnover of the company |
| 5 | for appointment to any office or place of profit in the company, its subsidiary company or associate company | Monthly remuneration two and a half lakh rupees. |
| 6 | for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company | One (1) percent of the net worth |
* The 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.
- Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a resolution in the general meeting and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three 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.
- 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, be 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, be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.
Related Party Transactions the Institute of Chartered Accountants of India Introduced Accounting Standard 18- ‘Related Party Disclosures’ and made it mandatory for companies to disclose related party transactions in the financial statements.
International Financial Reporting Standards (IFRS) has IAS 24 Related Party Disclosures requires disclosures about transactions and outstanding balances with an entity’s related parties. The standard defines various classes of entities and people as related parties and sets out the disclosures required in respect of those parties, including the compensation of key management personnel. Auditor of the Company needs to follow the provision as described.
These Ind AS are applicable to specified category of as discussed below:
Companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India;
1. Unlisted companies having net worth of Rs. 250 crore or more; and
2. Holding, subsidiary, joint venture or associate companies of companies covered in point (1) and (2) above.
3. Voluntary applicability: Company may voluntarily apply Indian accounting standards (Ind AS).
Disclaimer: – The above article is prepared keeping in mind all the important and basic question as well as provision of section 188 of the Companies Act, 2013 which comes in mind of a professional or other stakeholder while company entering into related party transaction. The author has tried to cover all the important and basic question. Under no circumstance, the author shall not liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.
(The Author is Corporate Consultant and provides varied array of services including Start-ups mentor, Secretarial, Legal, Trademark, taxation, Audit, GST, Book keeping and other ancillary advisory service in Delhi, Chandigarh as well as The National Capital Region (NCR) and can be contacted through email id:- [email protected] and Contact Number: 91-8178515005)
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