Following is the comparison of provisions given in the Companies Act, 2013 and SEBI (LODR) Regulations, 2015 relating to Related Party Transactions.

Sl. No. Particulars Companies Act, 2013 SEBI LODR
1. Applicability Applicable to the following:

♦ Companies incorporated under the Companies Act, 2013

Applicable to the following:

♦ Listed Companies having Paid-up share capital of more than ten crore or net worth of Rupees more than Twenty-Five Crore. (The listed entity to which provisions of Corporate Governance are applicable)

It may be noted that Regulation 23 of SEBI LODR governing Related Party Transaction shall not apply to listed companies not qualifying above criteria. Therefore, such a company shall follow provisions of Section 188 of Companies Act, 2013.

2.         Governing Section/ Regulation Section 188 of Companies Act, 2013 and Rule 15 of the Companies (Meeting of Board and its Power), Rules, 2014. Regulation 23 of SEBI (LODR) Regulations, 2015
3.         Definition of Related Party Section 2(76) of the Companies Act, 2013 defines the related parties.

Transactions specified in Section 188(1) entered by a company with the following persons shall be construed as a Related Party Transaction:

1. Director of a company

2. Relatives of Director

3. A KMP as defined in Section 2(51)

4. Relative of KMP

5.  Firm in which director or manager is a partner

6. Firm in which Relative of director or manager is a partner

7. A private company in which director or manager is a member or director

8. A Private company in which relative of director or manager is a member or director.

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

It may be noted that if a director or manager does not hold shares in a company then the transaction with such company shall not be considered as Related Party Transaction.

10. 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;

11. any person on whose advice, directions or instructions a director or manager is accustomed to act

e.g. If ABC Ltd and XYZ Ltd enters into a Shareholders agreement where ABC Ltd has more than 50 percent voting rights in all matters passed in the general meeting of XYZ Ltd. For XYZ Ltd every transaction entered into with the ABC Ltd is a Related Party Transaction and vice versa.

Exception to point 11:

Where a Body Corporate is giving advisory to a company then in such case transaction with body corporate shall not be considered as a RPT.

12. Holding, Subsidiary or Associate of the company

13. Sister concern of the company

14. Company which holds more than 20 per cent voting powers (or participation in business decision) in the Company.

Regulation 2 (zb) of the SEBI LODR defined the Related Party as a related party defined in Section 2(76) of the Companies Act, 2013.

As per the amended SEBI LODR, effective from 7th September 2021, the Related Party shall include any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed shall b deemed to be a related party.

Exception:

However, exception has been provided for the units of Mutual Fund which are listed on the Stock Exchange.

4.         Definition of Relative Section 2(77) of the Companies Act, 2013 defines the term Relative as

Two persons are said to be relative, if—

(i) they are members of a Hindu Undivided Family;

(ii) they are husband and wife; or

(iii) one person is related to the other in any of the following manner:

Father (including step father)

Mother (including step mother)

Son (including step son)

Son’s wife

Daughter (does not include Step Daughter)

Daughter’s husband

Brother (including step brother)

Sister (including step sister)

Regulation 2(zd) of the SEBI LODR does not differentiate from the term Relative as defined in Section 2(77) of the Companies Act, 2013.

Exception

However, exception has been provided for the units of Mutual Fund which are listed on the Stock Exchange.

 

5.         Scope of Related Party Transactions The following transactions with the related party shall be considered as related party transaction:

  • 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, it’s a subsidiary company or associate company
  • underwriting the subscription of any securities or derivatives thereof, of the company

The above transactions shall require approval of the Board.

Further, certain transactions exceeding limits given in Rule 15 of Companies (Meeting of Board and its Power), Rules, 2014 shall require prior approval by Ordinary Resolution passed in the general meeting of the members.

Regulation 2(zc) of SEBI LODR defines the related party transaction as the transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged.

It may be noted that here the scope of the related party is not limited to the transactions given in the Companies Act. Any transaction between a listed entity and a related party as defined in Regulation 2(zb) shall be construed as a related party transaction. Also, the concept of arm’s length basis transaction does not seem to exist in the LODR as all transactions with the related parties are considered as related party transactions.

Exception:

However, exception has been made for the units of Mutual Fund which are listed on the Stock Exchange.

 

6.         Transactions requiring Ordinary Resolution The following transactions are given in Section 188(1) exceeding the below limits shall require prior approval of members in the general meeting.

Nature of transactions Limit prescribed in Rule 15
 sale, purchase, or supply of any goods or material, directly or through the appointment of an agent ten percent or more of the turnover of the company
selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, ten percent or more of the net worth of the company
leasing of property any kind ten percent or more of the turnover of the company
availing or rendering of any services, directly or through the appointment of an agent, ten percent or more of the turnover of the company
 appointment to any office or place of profit in the company, it’s subsidiary company, or associate company A monthly remuneration exceeding 2,50,000
underwriting the subscription of any securities or derivatives thereof, of the company A remuneration exceeding one percent of the net worth

Note:

a. Limits prescribed above shall be calculated for transactions individually or taken together with the previous transactions during the FY.

b. turnover or net worth shall be computed on the basis of the audited financial statement of the preceding financial year.

All material-related party transactions are required to be approved by shareholders through ordinary resolution.

All transactions, individually or taken together with previous transactions during the FY, with related parties exceeding 10 percent of the annual consolidated turnover as per the latest audited financial statements, shall be considered as Material Related Party Transaction.

Exception:

Payment made to related party with respect to brand usage or royalty shall be considered as material if the payment exceeds the limit of five percent the annual consolidated turnover as per the latest audited financial statements. Effective from July 9, 2019

7.         No requirement of passing Ordinary Resolution or Board Resolution Exception:

Transactions with related parties in the ordinary course of business at arm’s length basis shall not require approval of Board or Shareholders.

Any transaction with a Wholly owned Subsidiary of the Company shall not require prior approval of members by an Ordinary Resolution.

However, approval of Board in the Board Meeting is necessary to carry out such transactions.

Exception:

Any transaction with a Wholly-owned Subsidiary of the Company shall not require prior approval of members by an Ordinary Resolution.

However, approval of Board in the Board Meeting is necessary to carry out such transactions.

8.  Voting A related party to the transaction who is also a member of the Company shall not vote on the transaction to approve such transaction.

Exception:

Related Party is allowed to vote on such transactions where ninety percent of members are related to promoters or related party to transaction.

All parties falling under the definition of Related Party shall be abstained from Voting.

Here the scope of the provision is wider than that of provisions of the Companies Act, 2013.

9. Approval of Audit Committee All related party transactions shall be approved by the Audit Committee before they are approved by the Board.

Also, any modification to the RTPs previously approved by the Audit Committee shall mandatorily be re-approved by the Audit Committee.

All related party transactions shall be approved by the Audit Committee before they are executed by the Company.

Only the members who are Independent Directors shall approve the Related Party Transactions. Effective from January 1, 2022.

10.     Omnibus approval by the Audit Committee The Audit Committee may make omnibus approval considering the following criteria:

(a) repetitiveness of the transactions (in past or in future);

(b) justification for the need for omnibus approval.

The omnibus approval shall be valid for one year.

The Audit Committee may make omnibus approval considering the following criteria:

(a) the criteria for granting the omnibus approval shall be in line with the policy prepared by the Company on related party transactions

(b) Nature of transaction shall be repetitive.

(c) omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year.

The audit Committee shall review related party transactions on a quarterly basis.

11.     Contents of Explanatory Statement The notice of the general meeting in which necessary shareholders approval is taken shall annex to it an explanatory statement containing the following:

(a) name of the related party;

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

(c) nature of the relationship;

(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.

No specific provision is mentioned in the LODR with respect to the explanatory statement to the notice of members’ meeting.
12.     Reporting in Board’s Report/ Annual Report Every related party transaction shall be disclosed in the Board’s Report as an annexure in Form AOC-2. Together with disclosure in the Board’s Report, the Annual Report of a listed company to which provisions of Corporate Governance are applicable shall contain disclosure as specified in Para A of Schedule V of the LODR.
13.     RPTs entered without BR or SR If any transaction with related party is entered by a director of a company without requisite Board’s or Member’s approval, then such transaction shall be ratified by the Board/Members within 3 months of the entering into a transaction.

If the transaction is not ratified by the Board/Members then such transaction shall be voidable at the option of the Board or the shareholders.

The concerned director shall indemnify the loss caused to the Company in case the transaction is not ratified by the Board/Shareholder.

No specific provision in the LODR.
14.     Website Compliance No specific provision in the Companies Act The listed entity shall upload the following on its website:

♦ policy on dealing with related party transactions

♦ Disclosure of Related Party Transactions made to Stock Exchange as required under Reg 23(9).

15.     Policy on dealing with related party transactions No specific provision in the Companies Act Every listed entity to which provisions of Corporate Governance (see Reg 15 of the LODR) are applicable shall formulate a policy on the materiality of related party transactions and on dealing with related party transactions.

The policy shall include the clear threshold approved by the Board. Effective from

Also, the policy shall be reviewed by the Board at least once every three years.

16.     Reporting of Related Party Transactions to the Exchange Not Applicable Disclosure of Related Party Transaction on a consolidated basis shall be submitted to the Stock Exchange within 30 days of publication of standalone and consolidated financial results.

Although reasonable care is taken in drawing the above analysis, nothing mentioned above shall be considered as legal opinion of the author. The author is an Associate member of Institute of Company Secretaries of India (ICSI). In case any further assistance is needed, the author can be contacted at [email protected] or +919702908418.

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