RELATED PARTY TRANSACTIONS

INTRODUCTION

  • The related party transaction is a type of an arrangement or deal between two or more parties for the consideration and any common Interest or business relationship is existing between the parties.
  • The Regulatory authorities & companies want to secure the interest of stakeholders in all the transaction or Business deal between the parties.
  • The transaction between related party should be on arms-length price & approved by the Board of Directors or Shareholders.
  • The list of the following Act or authorities who governed the provisions of related party transaction are:-

COMPANIES ACT, 2013

  1. Who is a related party?
  2. Who are relatives?
  3. List of related party transaction.
  4. Approval of bods for related party transactions.
  5. Shareholders approval for related party transactions.
  6. Case laws of related party transaction
  7. Approval of the audit committee for related party transactions.
  8. Ordinary course of business.
  9. Arm’s length transaction.
  10. Penalties for non-compliance for listed & unlisted companies.

SEBI (LISTING OBLIGATION & DISCLOSURE REQUIREMENT) REGULATION, 2015

  1. Related party transaction.
  2. Related party.
  3. Relative.
  4. Provisions.
  5. Omnibus approval by audit committee.
  6. Exception to omnibus approval.

COMPANIES ACT 2013

  • The section 2(76), 188 of Companies act, 2013 deals with the provisions of related party transaction.
  • The related party transaction means any arrangements or contracts or deals or transaction in written or orally between the related parties and company in respect of any transaction mention in the section 188.

WHO IS RELATED PARTY

Section 2(76) of the companies act, 2013 defines the term “related party” about a company are:-

  • Director;
  • Relative of Director;
  • KMP (Key Managerial personnel);
  • Relative of KMP;
  • The Director (except Independent Director) or KMP of the holding company or his relative.
  • The Director or manager or his relative is a partner in a firm;
  • A Director or manager or his relative is Director or member of a private company;
  • The director of the company is Director or manager of the public company and holds more than 2% of its paid-up share capital (as per latest audited financial Statement) along with his relative.
  • The Board of Directors, managing director or manager of any body corporate are accustomed to act by following the

  1. Directions of a director or manager or
  2. The advice of a director or manager or
  3. Instructions of a director or manager.

Except the advice, directions or instructions are given under professional capacity.

  • The Director or manager is accustomed to act on

  1. The advice of any person or
  2. Directions of any person or
  3. Instructions of any person

Except the advice, directions or instructions are given under professional capacity.

  • Any body corporate which is—

  1. A holding, subsidiary or an associate company of such company or
  2. A subsidiary of a holding company to which it is also a subsidiary or
  3. An investing company* or
  4. The venturer of the company*.

(This clause does not apply on a private company for section 188 (related party Transactions) Note:-*The investing company or the venturer of a company whose investment in the company and the company become an associate company of the investing company or the venturer of a company.

 

WHO IS RELATIVES

The Section 2 (77) of Companies act 2013 & Rule 4 of the Companies (Specification of Definitions Details) Rules 2014 define the meaning of Relatives (Who related to another) considered for related party transactions are:-

 

  • HUF (Hindu Undivided Family) Members;
  • Husband & wife;
  • Mother includes Step-mother;
  • Father Includes Step-father;
  • Son includes Step-son;
  • Daughter;
  • Son’s wife;
  • Daughter’s Husband
  • Brother includes Step-brother &
  • Sister Includes Step-sister.

LIST OF RELATED PARTY TRANSACTION

  • The section 188(1) of Companies Act, 2013 & Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides the list of related party transaction or deals or arrangement or contracts to be taken place in the company with the prior approval of BODs (Board of Director) or Shareholders.
  • This section applied to all the Public company (Listed & Unlisted) & private company who entered into related party transaction or arrangement or contracts.

APPROVAL OF BODs FOR RELATED PARTY TRANSACTIONS

  • The company entered into any transaction or contracts or arrangement with the related party shall be required the prior approval of BODs by passing Board resolution (Majority of directors vote in favour) in Board meeting only.
  • The provision of related party transaction or Section 188 shall not apply to the company who entered into any transaction or contracts or arrangement with related parties in the ordinary course of business at arm’s length price.
  • The agenda of the board meeting shall reveal the following details of related party transactions are:-

  1. Personal Details of the related party;
  2. Duration & essence of contract or arrangement;
  3. All Terms & Conditions of contract or arrangement;
  4. Details of the method used to determine the value or price of contract or arrangement;
  5. The Factors considered or not considered for contract or arrangement & etc.

  • Any Director is interest in any transaction or contracts or arrangement with related then he shall not allow to sit or attend the Board meeting for discussion on the resolution.
  • The all Related party transaction mention below are required the prior approval of BODs are:-

  1. Sale goods or materials;
  2. Purchase of goods or materials;
  3. Supply of goods or materials;
  4. Selling any kind of property;
  5. Disposing of any kind of property;
  6. Buying of any kind of property;
  7. Leasing of any kind of property;
  8. Availing of services;
  9. Rendering of services;
  10. Agent appointed for purchase or sales of goods or material or property;
  11. Agent appointed for Availing & rendering any services;
  12. Any related parties appointed to any office or place of profit in the Company or its Subsidiary Company & Associate Company.
  13. Underwriting of any Securities subscription of the company;
  14. Underwriting of any Derivatives of the company.

SHAREHOLDERS APPROVAL FOR RELATED PARTY TRANSACTIONS

  • The provision of related party transaction or Section 188 shall not apply to the company who entered into any transaction or contracts or arrangement with related parties in the ordinary course of business at arm’s length price.
  • The 2nd Proviso of Section 188(1) of companies act, 2013 provides that the member (related party to transaction) of the company shall not allow voting for the resolution of related party Transaction or contract or arrangement entered with the company Except

  1. The 90% or more members in the number of the company are the relatives of promoters or related parties;
  2. Private Company;
  3. Government Companies (Transaction with Government of India or Government company (Unlisted company) get prior approval from the Ministry or Department) &
  4. IFSC (International Financial Services Centre) unlisted Public company.

  • As per 1st Proviso of Section 188(1) of companies act 2013 & Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the company shall not enter into below mention transaction or contract or arrangement exceeds the below mention limit except with the prior approval of the company members through passing Ordinary Resolution (Majority members vote in favour) in general meeting Except

  1. Any Transaction between Holding & WOS (Wholly-owned Subsidiary) whose account is consolidated and present in front of shareholders for approval.
  2. The holding company members passed a resolution for related party transaction then WOS members not required to pass another resolution.
  3. Government Companies (Transaction with Government of India or Government company (Unlisted company) get prior approval from the Ministry or Department).

  • The holding company members passed resolution for related party transaction then WOS members not required to pass another resolution.
  • The Threshold Limits are provided for the related party transaction is calculated after taking into all Individual & Previous transaction with the same party.

Example:-

  • Company Threshold Limit:- 40 cr.Current Transaction value: 30cr.
  • Previous Transaction value: 13 cr.
  • The Related party transaction exceed by 3 cr. then Ordinary resolution is mandatory.

 

The following is the list of transaction requires the prior approval of Members are:-

 

  • Sale or purchase or supply of any goods or material amounting

10% or more of the turnover

or

Rs.100 cr.

(Whichever is Lower)

 

  • Any agent appointed for Sale or purchase or supply of any goods or material amounting

10% or more of the Company turnover

or

Rs.100 cr.

(Whichever is Lower)

 

  • Selling or Buying or Disposing of any kind of property amounting

10% or more of the Company net-worth

or

Rs.100 cr.

(Whichever is Lower)

 

  • Any agent appointed for Selling or Buying or Disposing of any kind of property amounting

10% or more of the Company net-worth

or

Rs.100 cr.

(Whichever is Lower)

 

  • Leasing of any property amounting

10% or more of the Company annual turnover

or

10% or more of the Company net-worth

or

Rs.100 cr.

(Whichever is Lower)

 

  • Rendering or Availing of any services amounting

10% or more of the Company net-worth

or

Rs.50 cr

.(Whichever is Lower)

 

  • Appointment of any agent for Rendering or Availing of any services amounting

10% or more of the Company net-worth

or

Rs.50 cr.

(Whichever is Lower)

 

  • The appointment In the company or subsidiary or associate company to any office or place of profit at a monthly remuneration exceeding Rs. 2,50,000.
  • Remuneration payable for underwriting the subscription of any securities or derivatives exceeding 1% of Transaction value.

CASE LAWS OF RELATED PARTY TRANSACTION

  • The agreement of License & Leave is not treated as equivalent to the leasing of property.
  • Shares & debenture issued to a related party is not covered under related party transaction.
  • Buyback of shares is not treated as a related party transaction.
  • The related party transaction between two foreign subsidiaries covered under Ind-AS but no approval required under section 188 of the companies act, 2013.
  • Any Transactions arising out of compromises, arrangements and amalgamation covered under a specific section of companies act 2013 & not covered under section 188.

APPROVAL OF AUDIT COMMITTEE FOR RELATED PARTY TRANSACTIONS

  • The section 177 (4) (4) of companies act,2013 provides the approval of Audit Committee shall require for the company before entering into any related party transaction irrespective of transaction in the ordinary course of business or not and has right to do modification in the Transaction or contract or arrangement.
  • The following companies required the approval Audit committee are:-

  1. Listed public companies or
  2. Public companies having Paid-up share capital Rs. 10 crores or more or
  3. Public companies having a Turnover of Rs. 100 crores or more or
  4. Public companies whose aggregate, outstanding loans, debentures and deposits, exceeding Rs. 50 crores.

  • The Audit committee approval required after Boards of Director approval.
  • Any transaction or contract or arrangement between the listed company & wholly-owned subsidiary not required the approval of the Audit Committee.
  • The audit committee has a right to provide omnibus approval for all related party transaction after getting approval from the Board of Directors for the maximum one financial year.
  • The Omnibus approval is not valid for any transaction or contract or arrangement for selling or disposing of the company undertaking.
  • The omnibus approval shall include the following information & details are:-

  1. Transaction value limit;
  2. Disclosure to audit committee before taking omnibus approval;
  3. Review the transaction by the audit committee on some interval;
  4. Transaction not required omnibus approval;
  5. Arms’s length price for transactions;
  6. Nature & duration of the transaction.

  • Any transaction or contract or arrangement between the listed company & wholly-owned subsidiary not required the approval of the Audit Committee.

ORDINARY COURSE OF BUSINESS

  • The term “ordinary course of business” used in the various provision of related party transaction and the companies act, 2013. These are the transaction which is usually transaction, practices & custom taken place in the normal course of Business.
  • Eg. loans provided by the Bank or Financial institutions.
  • The transaction has a relation with the company normal business or corporate historical practices that performed in the ordinary course of business.

ARM’S LENGTH TRANSACTION

  • The term “arm’s length transaction” means any transaction or contract or arrangement between two or more party at a price as if they are not related to each other.
  • The transaction shall not include any self-interest or his relative in the transaction and the parties to the transaction are not controlled by the other.
  • The arm’s length transaction is a transaction between unrelated parties & there would be no influence or force of any other person.

PENALTIES FOR NON COMPLIANCE

LISTED COMPANIES

Imprisonment for one year.orFine of Minimum Rs. 25000/- & maximum Rs. 500000 or Both

 

OTHER COMPANIES

Fine of Minimum Rs. 25000/- & maximum Rs. 500000

 

 

SEBI (LODR) REGULATION, 2015

 

RELATED PARTY TRANSACTION

  • The transaction or contract or arrangement related to the transaction mention in section 188(1) of the Companies Act, 2013.
  • As per the regulation 2 (1) (ZC) of SEBI (LODR) Regulation, 2015 defines the “related party transaction” means there is any transfer of services, resources or liability between the related party and listed entity irrespective of consideration is charged or not and the transaction shall include single or group of transaction in contract or arrangement Except

  1. The entity issued mutual funds units which are listed on the recognised stock exchange (BSE, NSE & MCSX).
  2. The SEBI(LODR) Regulation 2015 shall not be applied to a company who entered into any transaction or contracts or arrangement with related parties in the ordinary course of business & arm’s length price.

RELATED PARTY

The regulation 2 (1) (ZB) of SEBI (LODR) Regulation, 2015 defines the term “related party” means the related party defines under section 2(76) of the companies act, 2013 or under applicable Accounting standards Except

  • The entity issued mutual funds units which are listed on the recognised stock exchange (BSE, NSE & MCSX) Except
  • Any person or entity belongs to promoter or promoter group of the listed entity & holds 20% or more of its shareholding then they are considered as a related party.

RELATIVE

The regulation 2 (1) (ZB) of SEBI (LODR) Regulation, 2015 defines the term “relative” as per the Section 2 (77) of Companies act 2013 & Rule 4 of the Companies (Specification of Definitions Details) Rules 2014 define the meaning of Relatives (Who related to another) considered for related party transactions are:-

 

  • HUF (Hindu Undivided Family) Members;
  • Husband & wife;
  • Mother includes Step-mother;
  • Father Includes Step-father;
  • Son includes Step-son;
  • Daughter;
  • Son’s wife;
  • Daughter’s Husband
  • Brother includes Step-brother &
  • Sister Includes Step-sister.

EXCEPT The entity issued mutual funds units which are listed on the recognised stock exchange (BSE, NSE & MCSX).

 

SEBI PROVISIONS

  • Regulation 23 of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 provides the following provisions for related party transaction are:-
  • The Board of Directors approved & reviewed at least once in the 3 years to material transaction policy along with threshold limit prepared by the listed entity.
  • The approved material transaction policy upload on the company website.
  • The company entered into any transaction or contracts or arrangement (Aggregate of previous & new transaction) with any related party exceeds the 10% of annual consolidated turnover (as per latest Audited financials) of the listed entity shall be treated as a material transaction.
  • The listed entity entered into payment transaction for brand usage or royalty with a related party and the transaction (Individually or taken together with previous transactions) exceeds the threshold limit of 5% of annual consolidated turnover shall be treated as a material transaction.
  • The material transactions related to a related party shall require the approval of the shareholders by passing ordinary resolution Except

  1. Any transaction between Holding company & WOS (Wholly-owned subsidiary) if holding company members passed a resolution for related party transaction then WOS members not required to pass another resolution.
  2. The transaction between two government companies.

  • All entities falling under the meaning of related party shall not be allowed to vote or approved the relevant transaction irrespective of a transaction related to them or not.
  • The listed entity shall submit a disclosure of related party transaction or contract or arrangement within 30 days of filing half-yearly consolidated financial result with the stock exchange.
  • Half-yearly consolidated financial result & disclosure of related party transaction or contract or arrangement shall publish on the company website.

OMNIBUS APPROVAL BY AUDIT COMMITTEE

  • The Audit Committee of listed entity has a right to provide omnibus approval for all related party transaction after getting approval from the Board of Directors for the maximum one financial year.
  • All related party transaction shall require prior approval of the Audit Committee
  • The Omnibus approval is not valid for any transaction or contract or arrangement for selling or disposing of the company undertaking.
  • The omnibus approval shall include the following information & details are:-
  • Transaction value limit;
  • The transaction is repetitive in nature;
  • Disclosure to audit committee before taking omnibus approval;
  • Review the transaction by the audit committee on some interval;
  • Transaction not required omnibus approval;
  • Arm’s length price for transactions;
  • Nature & duration of the transaction.

Exception The omnibus approval by the audit committee shall not be required in case of the following companies are:-

  • Any transaction between Holding company & WOS (Wholly-owned subsidiary) if holding company members passed a resolution for related party transaction then WOS members not required to pass another resolution.
  • The transaction between two government companies.

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