Related Party Transactions (RPTs) vs. Approvals of RPTs under Section 188 of Companies Act, 2013 – Are They the Same?
There’s a common misconception that only transactions covered under Section 188 of the Companies Act, 2013 (the “Act”) are considered Related Party Transactions (RPTs). But that’s not the case!
Let’s break it down by an example
Is Remuneration paid to Directors a Related Party Transaction (RPT)? and does it need approval under Section 188(1) of the Companies Act, 2013 (the Act)?
Let’s break it down
- As per Section 2(76) of the Act, Directors and KMPs are considered Related parties.
- Any transaction entered into with them, including remuneration, is an RPT.
But here’s the catch:
Not all RPTs require approval under Section 188(1), only those transactions enlisted u/s 188(1) requires approval. But every transaction including remuneration with Related party requires approval of Audit Committee u/s 177(4)(iv) and compliance with Section 197 of the Act too.
Furthermore, question arises: whether such payment of Remuneration to Directors i.e. an RPT, required to be approved by the Board of Directors u/s 188(1) of the Act?
Payment of Remuneration to Directors can be covered under the following clauses of Section 188(1):
Clause (d) – availing or rendering of services; and
Clause (f) – related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company.
There are a lot of deliberations in the industry that whether the payment of remuneration of Director’s shall be covered under clause (d) as availing of services of a director or not?
View can be taken by reading Section 188 of the Act in commensurate with the Explanation, that for anything over and above remuneration clause (f) is applicable, If a director is receiving any consideration to which he is entitled to by way of his remuneration including salary, fee, commission, perquisites, any rent-free accommodation, or otherwise then it will not require approval under clause (d) of Section 188(1). However, if a Director receives anything other than his entitlement then that transaction would require approval u/s 188(1).
Further, Section 188(1) is not applicable if the transaction is on arm length basis and in ordinary course of business. Further one can also opine that payment of remuneration to directors is in ordinary course of business
In summary:
- All transactions with related parties = RPT
- Approval by Audit Committee = Mandatory for all RPT’s, including those covered u/s 188 of the Act. (for companies where constitution of Audit Committee is applicable)
- Approval by Board/Board & Shareholders u/s 188(1) = Only if transaction falls under its specific clauses and is not at arm’s length/in ordinary course
Views may differ. Interpretations evolve.
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