Explore the regulations governing Related Party Transactions (RPT) under the Companies Act, 2013. Understand the definitions, procedures, and conditions for RPT, along with the implications of non-compliance.
Meaning of Related Party (as per the Companies Act, 2013) [2(76)] :
| A Director or his relative | A KMP or his relative | A Firm
↓ In which Director, Manager or his relative ↓ Is Partner |
A Private Company
↓ in which a director or manager [or his relative] ↓ Is member or director |
A public Company
↓ in which a director or manager ↓ Is director [and holds] along with his relatives, ↓ more than 2% of its paid-up share capital |
Any body corporate whose BOD, MD 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
↓ director or manager is accustomed to act |
Any body corporate which is
i) a holding/ subsidiary / an associate company of such company ii) a subsidiary of a holding company to which it is also a subsidiary; iii) an investing company or the venturer of the company |
Procedure for Related Party Transaction
1. Pass Board Resolution for specified agreements [Sec-188(1)] with RP with such conditions.
2. Pass Special Resolution in General Meeting for following transactions. Not required for transactions entered into between a holding company and its wholly owned subsidiary:
(a) contracts or arrangements related to clauses (a) to (e) of section 188(1)-
| 1. | sale, purchase or supply of any goods or material [clause(a) & clause(e)] | Directly/agent | ≥ 10% of turnover |
| 2. | selling or otherwise disposing of or buying property [clause(b) & clause(e)] | Directly/agent | ≥ 10% of networth |
| 3. | leasing of property [clause(c)] | – | ≥ 10% of turnover |
| 4. | availing or rendering of any services [clause(d) & clause(e)] | Directly/agent | ≥ 10% of turnover |
(b) Appointment of RP to any office or place of profit in the company, its SC or AC at monthly remuneration > 2.5 lakh rupees.
(c) Remuneration for underwriting the subscription of any securities or derivatives > 1% of the net worth.
3. No RP shall vote. Not applicable where ≥ 90% in number are relatives of promoters or are related parties.
4. This section is not applicable where transactions are in its ordinary course of business other than transactions which are not on an arm’s length basis.
5. RPT shall be referred to in the Board’s Report placed before the shareholders along with the justification
6. Any contract/arrangement entered by director/employee – without obtaining BR/ SR – which is not ratified by the Board OR by shareholders within 3 months – voidable at the option of Board/Shareholders. It RPT is with a related party to any director or authorised by any other director , the director concerned shall indemnify the company.
7. Penalty for director or employee-
(i) in case of listed company, 25 Lakh
(ii) In case of any other company, 5 Lakh
RPT AS PER LODR
1. Listed Entity Shall – formulate policy – on material RPT. It shall be reviewed once in every 3 years by the Board.
| Transaction | Exceeds :
Rs. 1000 crore Or 10% of annual consolidated T/O :- Lower |
| Transaction related to Royalty or Brand usage | Exceeds : 5% of annual consolidated T/O |
2. Meaning of Material RPT –
3. All RPT and subsequent material modifications shall require prior approval of IDs of Audit Committee.
4. When Subsidiary of LE is a party
↓
Prior approval of Audit Committee of LE
↓
If transaction exceeds – 10% of T/O of subsidiary company
5. The Audit Committee may grant Omnibus Approval for RPT which shall be valid for 1 year and it shall review the details of RPT entered by LE on quarterly basis.
6. All material RPT and subsequent modification – require – prior approval of Shareholders.
7. Above provisions not applicable :
(i) Btwn 2 Government Companies
(ii) Holding Company and Wholly Owned Subsidiaries
8. Listed Entity – disclosure to SE – every 6 months on the date of publication of its standalone and consolidated financial results with effect from April 1, 2023.
188(1) ARRANGEMENT/CONTRACTS
(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) appointment of any agent for purchase or sale of goods, materials, services or property;
(e) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
(f) underwriting the subscription of any securities or derivatives thereof, of the company:
CONDITIONS
A company shall enter into any contract or arrangement with a related party subject to the following conditions, namely:-
(1) The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-
(a) The name of the related party and nature of relationship;
(b) The nature, duration of the contract and particulars of the contract or arrangement;
(c) The material terms of the contract or arrangement including the value, if any;
(d) Any advance paid or received for the contract or arrangement, if any;
(e) The manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
(f) 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
(g) Any other information relevant or important for the Board to take a decision on the proposed transaction.
“OFFICE OR PLACE OF PROFIT”
i) where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
(ii) where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if they receive from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
RPT AS PER LODR
RELATED PARTY – As defined in Section 2(76) of Companies Act, 2013. Provided :
Any person/entity who is part of promoter or promoter group of LE
OR
Any person/entity holds 10% or more equity shares in LE directly or through beneficial interest.
RELATED PARTY TRANSACTION
Transfer of services, resources or obligations btwn :
(i) LE or subsidiaries
And
Related party of LE or its subsidiary
(ii) LE or subsidiarym And Any person/entity :- the purpose & effect of which is to benefit a RP of LE/subsidiary whether price charged or not
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