Related Party under Companies Act, 2013

“Explore the intricacies of Related Party Transactions under Companies Act, 2013, AS 18, and IND AS 24. This article delves into definitions, criteria, and approvals, comparing with Revised Clause 49 of SEBI Listing Agreement. Learn about disclosures, remedies, and penalties for non-compliance, gaining insights into the evolving regulatory landscape. Uncover the details required for comprehensive reporting and compliance, ensuring a clear understanding of the complex web of relationships and transactions within corporate entities.”

Article compares disclosure required under Companies Act, 2013, Accounting Standard 18 and IND AS 24.It Further explains Related Party Transactions under the Companies Act and Revised Clause 49 of SEBI Listing Agreement.

Related Party under Companies Act, 2013, Accounting Standard 18 and IND AS 24

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 relatives, more than two per cent of its paid-up share capital;

6. anybody 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;

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

that nothing in sub-clauses (6) and (7) shall apply to the advice, directions or instructions given in a professional capacity;

8. any company which is— – a holding, subsidiary or an associate company of such company; or – a subsidiary of a holding company to which it is also a subsidiary; * ** included in Amendment 2017

9. such other person as may be prescribed;

*An investing company or the venturer of the company.

**private companies & units of an unlisted public company in an International Financial

Services Centre in SEZs the above mentioned relationships (given in point 8) are outside the scope of RPTs.

Significant Influence can be by

Relative – in relation to an individual, means the spouse, son, daughter, brother, sister, father and mother who may be expected to influence, or be influenced by, that individual in his/her dealings

the Owner of 50% or more Shares,

Controlling Composition of the BoD

Gaining Substantial (26%) in the voting power

The concept of Relative in broaden in Ind AS 24 as ‘relative’ is now “Close members” of the family and concept of Domestic partner is introduced. Further KMP of parent entity and close member of that person’s family included under IND-AS 24.

Significant influence is the power to participate in the financial and operating policy decisions of an entity, but is not control over those policies. Significant influence may be gained by share ownership, statute or agreement.

Per Listing Agreement As per the Listing Regulations (Regulation 2(zb)), an entity should be considered as related to the

a. Such entity is a related party under Section 2(76) of the 2013 Act, or

1. two companies simply because they have a director in common unless the director is able to affect the policies of both companies in their mutual dealings
2. a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant volume of business, simply by virtue of the resulting economic dependence.
3. Providers of Finance , trade union, Public Utilities & Government departments although they may circumscribe the freedom of action of the enterprise or participate in its decision making process
4. Significant volumes of business with a customer or supplier do not necessarily create a related party relationship with them.

1. The name of the transacting related party;

2. A description of the relationship between the parties;

3. A description of the nature of transactions;

4. Volume of the transactions either as an amount or a part thereof;

5. Any elements of the related party transactions which is necessary for an understanding of the financial statements;

6. Outstanding amount from related parties at the balance sheet date;

7. Provisions for doubtful debts due from related parties at the balance sheet date; and

(b) the amount of outstanding balances, including commitments, and: (i) their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and (ii) details of any guarantees given or received;

(c) provisions for doubtful debts related to the amount of outstanding balances

(d) the expense recognised during the period in respect of bad or doubtful debts due from related parties.

Further disclosures shall be made separately for each of the following categories:

(b) entities with joint control or significant influence over the entity;

(e) joint ventures in which the entity is a venturer;

(f) key management personnel of the entity or its parent; and

(g) other related parties

Brief on the Related Party Transactions under the Companies Act and Revised Clause 49 Listing Agreement SEBI

To claim exemption from special resolution of disinterested shareholders (this provision shall not apply to a private company, vide Notification No. GSR 464(E) dated 5th June 2015) either the transaction has to be in the ordinary course of business and at arm’s length or below the prescribed threshold. Based on the criteria above, it needs to be ensured that the transaction value does not exceed threshold given in table. If either of the two criteria is breached, a company will not be eligible to avail exemption unless the transaction entered into by the company is in its ordinary course of business and it has been entered into on an arm’s length basis.

all related party transactions require prior approval of the Audit Committee, irrespective of whether they are material or not.

RC49 also requires all material related party transactions to be approved by the shareholders through special resolution.

Related parties should abstain from voting on such resolutions. Unlike the 2013 Act, RC49 does not exempt material related party transactions from special resolution of disinterested shareholders based on the criteria, viz., (i) transaction is in the ordinary course of business and at arm’s length, or (ii) prescribed thresholds regarding transaction value and share capital are not breached.

RC49 does not make any reference to the board approval for related party transactions.

Also, under RC49, one of the functions of the board is to “monitor and manage potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.” This suggests that the board also need to approve all material related party transactions entered into by a listed company.

A transaction with a related party is considered to be material if the transaction/transactions to be entered into individually or taken together with previous transactions during a financial year, exceeds 10% of the annual turnover of the company as per its last audited financial statement

To comply with RC49, a listed company needs to get all related party transactions approved (including grant of an omnibus approval) by the Audit Committee.

It also needs to get all material related party transactions approved by the Board and Special Resolution of Disinterested Shareholders. The exemptions given under the 2013 Act will not apply.

*Omnibus Approval (OA):- Audit Committee may grant omnibus approval for a transaction not exceeding 1 crore rupees per transaction.

OA shall be valid for a period of 1 year and after expiry of 1 year, fresh approval is required.

Details of material related party transactions on a quarterly basis along with the compliance report on corporate governance