Navigating the Complexities of Related Party Transactions in Business

Related party transactions refer to transactions that occur between two parties who have a pre-existing relationship or connection. These parties could include individuals, companies, or entities that are somehow linked, such as through common ownership, control, or influence. 

These transactions can take various forms, such as the sale or purchase of goods, provision of services, lending or borrowing of money, or leasing of assets. Related party transactions can be both financial and non-financial in nature. 

It’s important to disclose and properly account for related party transactions to ensure transparency and prevent potential conflicts of interest. Regulations and accounting standards often require companies to disclose the nature and extent of related party transactions in their financial statements. 

Section 188 of the Companies Act 2013 in India deals with related party transactions. It provides guidelines and regulations regarding transactions between a company and its related parties. 

What is Related Party? 

Section 2(76) of Companies Act,2013 defines the related party. Related Party with reference to a company means- 

1. A director or his relative; 

2. A key managerial personnel or his relative; 

3. A firm in which a director, manager or his relative is a partner;

4. A private company in which a director or manager or his relative is a member or director;

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

6. Any body corporate whose Board of Directors, managing Director or manager is accustomed to act on the directions of director or manager;

7. Any person on whose directions a director or manager is accustomed to act; 

Provided if any person is giving advice or directions in professional capacity then such provision shall not apply on him. 

8.  Any body corporate which is: 

A holding, subsidiary or an associate company of such company; 

• A subsidiary of a holding company to which it is also a subsidiary; 
• An investing company or a venturer company 

1. Such other person as may be prescribed 

Who is Relative? 

Section 2(77) of the Companies Act,2013 explain that who shall be treated as relative. Relative with reference to any person, means any one who is a related to another, if: 

1. They are members of HUF 

2. They are husband and wife 

3. The one is related to the other in the manner indicated in Rule 4 of companies (Specifications of definitions details) Rules, 2014. 

As per aforesaid Rule 4, a person shall be deemed to be relative of another, if he or she is related to another in the following manner, namely 

1. Father (includes step-father) 

2. Mother (includes step-mother) 

3. Son (includes step-son) 

4. Son’s wife

5. Daughter 

6. Daughter’s husband 

7. Brother (includes step-brother) 

8. Sister (includes step-sister) 

 Meaning of Related Party Transactions 

Section 188 of the Companies Act 2013 pertains to related party transactions in India. It sets out the legal framework and guidelines for conducting such transactions in companies incorporated under Indian law. 

Prior approval of the board of directors is required for any related party transaction. If the value of the transaction exceeds prescribed thresholds, approval from shareholders is also necessary. The details of the transaction, including its value, terms, and any other relevant information, must be disclosed in the financial statements of the company. 

Meaning of Profit of Place of profit: 

1. If any place of profit held by any Director and receive from company anything over and above the remuneration as a director. 

2. If any place of profit held by other than director and receive anything by way of remuneration from company. 

Important Points to be notes: 

• The Turnover or Net worth above mention shall be computed on the basis of the Audited Financial Statement of the proceeding financial year. 
• If the transaction is in the ordinary course of business and done on an arm’s length basis it shall not require the approval of the board or the company. 
• Not required to pass resolution if the transaction is between holding company and its wholly owned subsidiary. 
• No member shall vote on the resolution if such member is a related party. 
• But if ninety percent or more members are interested then such provision shall not apply. 
• Details of every contract entered into shall find its reference in the Board’s report along with justification about the same. 

Consequences of irregularities of compliance:  

• Ratification of the transaction may be done by the Board or the shareholders within three months. If the same is not done, then the contract will be voidable at the option of the Board. 
• Non-compliance with the requirements stated in the Companies Act can render the transactions void. 
• If any director authorised the contract, the director must indemnify the company for any losses. 
• The company can proceed against the director or the employee for recovery of loss, if any, due to RPTs. 
• Any director or any other employee of company who had entered into or authorised the contract or arrangement in violation of the provisions of the section shall 

1. In case of a listed company, liable to a penalty of twenty-five lakh rupees, 

2. In case of any other company liable to a penalty of five lakh rupees.