Companies Act 2013 –

Related Party

Transactions

Chinnsamy GanesanFCA DISA(ICA)

Presentation at the

Refresher Course on Company Law

organised by the

EIRC of ICAI on 25.04.2020

Procedural requirements

Related PartyRelated Party Transactions

Structure of the discussion

Powers of the shareholders

Powers of the Board and Audit Committee

Frequently asked questions

Related Parties

Laws relating to Related Party

Transactions

Companies

Act, 2013 and

Rules (Sec

188)

SEBI LODR

(Regulation

23 read with

Sch.V

Accounting Standards

3 Possible Levels

Company

level

Management

Level

Individual

Level

Related Parties

ChildrenGrandparents

3

Relative

SpouseHUFParents

Individual

Grandchildren

Firm

Directors

Key

Management

Personnel

Private

Company

2

Management Level

Relative

Public

Company

Partner

Director

Director and owner >2%

share capital

Several/Joint/ Direct/Indirect Influence

Body Corporate of Entity

influencing in non-professional

capacity

Associate

Holding

Fellow

Subsidiary

Subsidiary

1

Company Level

Related Parties

ChildrenGrandparents

3

Relative

SpouseHUFParents

Individual

Grandchildren

Parents include “step

parents”

Children include “step

children”

Brother (including step

brother)

As per rules others prescribed as relatives are

Son’s wife Daughter’s husband

Sister (including “step sister”)

A Quick referencer

Cases of Relative AS 18Cos. Act,

2013IT Act, 1961 Cases of Relative AS 18

Cos. Act,

2013

IT Act,

1961

Members of HUF No Yes Yes Mother's father No Yes No

Husband/ wife Yes Yes Yes Son's son/ daughter No Yes Yes

Father Yes Yes Yes Daughter's husband No Yes Yes

Mother (including step -

mother)Yes Yes Yes Son's daughter's husband No No No

Son (including step-son) Yes Yes Yes Daughter's son No No No

Daughter (including step

daughter)Yes Yes Yes

Daughter's Son's wifeNo No

No

Son's son's wife Yes

Brother (including step

brother)Yes Yes Yes Daughter's daughter No No No

Sister (including step sister) Yes Yes Yes Daughter's daughter's husband No No No

Son's wife No Yes Yes Son's daughter's husband No No No

Father's father No Yes Yes Daughter's Son's wife No No No

Father's mother No Yes Yes Brother's wife No No Yes

Mother's mother No Yes No Sister's husband No No Yes

Ind AS 24 also covers Domestic Partner, Children and dependents of the

Individual, Spouse and Domestic Partner

A check point

Mr. X has an investment in A Limited and B Limited

When B Limited is related party from the

perspective of A Limited

Will A Limited and B Limited be related

parties, if Mr. X has only significant

influence over both A Limited and B

Limited

When A Limited is related party from the

perspective of B Limited

Subsidiary Companies [Sec 2(87)]

Company C ('Subsidiary')

Holding

(Company A)

Company B

('Subsidiary')

Owns/ controls >50% of

total voting rights

or Board Control

Owns/ controls >50% of

total voting rights

or Board Control

Subsidiary (Company B)

Holding

(Company A)

Owns/ controls >50%

total voting rights

or Board Control

1 2

Controlling the reporting

entity (Parent and ultimate

Parent)

Controlled by the reporting

entity (Subsidiary)

Under the Common Control

(Fellow subsidiaries)

Associate Companies [Sec 2(87)]

Associate Company

Investing Company

Owns/ controls ≥ 20% total voting power

Or Controls business decisions under agreement

Check Points

Whether the definition of related party is same as that of AS 18

and Ind AS 24?

Whether the definition of related party for the purposes of

Sec 40A (2) (b) of the Income Tax Act, 1961?

Whether the definition of “Control” and “Significant Influence” is

different from the definition given in AS or Ind AS?

Check Points

▪ A Limited is a parent entity with 3 wholly owned subsidiaries, B Limited,

C Limited and D Limited

▪ Further, E Limited is an associate of A Limited

▪ F Limited is a wholly owned subsidiary of E Limited

▪ Who all are related parties to F Ltd?

Related Party Transactions

Transactions Covered

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

Appointment to any office or place of

profit in the company, its subsidiary

company or associate company

Underwriting the subscription of any securities or

derivatives thereof, of the company

Un-authorised contract – Penalty Rs.25,000 to Rs.5 Lacs with/ without 1 year

imprisonment (loss can also be recovered)

Exempted Transactions

Nothing in section 188 (1) shall apply to any transactions entered into

by the company in its ordinary course of business other than

transactions which are not on an arm’s length basis

Such transaction needs no approval of the Board of directors and

shareholders

Exemption for a private limited company

Proposed transactions to be entered by a private company with its holding,

subsidiary, associate and subsidiary of its holding company shall not require

requisite approval under section 188

If the counter-party to such a transaction is a public company, then such

counter-party will be under obligation to comply with the provisions of

section 188

By virtue of the amendment vide the MCA Notification

dated 5 June 2015

A related party who is a member of a private company is eligible to vote on

ordinary resolutions approving the contract or arrangement which may be

entered into by the private company

Some focus points

The scope of existing provisions has been widened to include selling, buying

and leasing

An arms length transaction entered into in the ordinary course of business of

the company is an exception to the related party transaction rule

Shareholder’s approval for non-cash transactions with Directors of the

company, its holding, its associated company, or a person connected with

him would be required

Company should not acquire assets from directors of the Company, its

holding and its associates company

Approval process

Transaction with Related Party?

Specified transaction? No further action required

Transactions in ordinary

course of business?No further action required

ALP? Transactions > specified amount

OR capital > Rs.10 Cr

Approval of shareholders by

ordinary resolution and

board approvalNo prior approval

Only board

approval

required

Yes

Yes

YesYes

No

No

No Yes

No

Prior approval of shareholders required by ordinary resolution, if

Related Party Transactions

Share capital is Rs.10 Cr

or more

Sale of goods > 10% of

annual turnover or Rs.100

Cr whichever is lower

Sale of services > 10% of

annual turnover or Rs.50

Cr whichever is lower

Leasing > 10% of net

worth or 10% of annual

turnover or Rs.100 Cr

whichever is lower

Sale/ purchase of property

> 10% of net worth or

Rs.100 Cr whichever is

lower

Underwriting commission

> 1% of net worth

Appointment of place of profit > Rs. 2.50 Lac p.m. in the Company or n

its subsidiary or associates

Resolution for related party transactions

Name and nature of relationshipMaterial terms of the contract or

arrangement

Any advance paid or received for

the contract or arrangement

Any other information that maybe

relevant for the Board to take a

decision

In respect of contracts not at arms’ length, justification for entering into

such contracts/ arrangements or transactions shall also be included

Section 180 (1) read with Rule 8 (2) of Companies (Accounts) Rules

2014 requires minimum information about the RPT

Frequently asked questions

Whether interested director be present/ vote at the meeting?

Whether interested member vote in a resolution relating to

related party transactions?

Where a Board meeting is held prior to the Audit Committee

meeting and the Board approves a transaction with a related

party. Can the Audit Committee approval be taken subsequently?

Frequently asked questions

Whether issue of “shares and debentures” to a related party, covered under

the ambit of Section 188?

When a transaction takes place between two foreign subsidiaries which are

consolidated in the accounts of the holding company, whether Sec 188 for

such transactions between subsidiaries will be applicable?

If a company has taken an immovable property from a HUF in which a

director is member, will it be regarded as a transaction with a related party?

Would the appointment of a Managing Director of a holding company as

Chairman in a subsidiary company be treated as related party transaction

even if he is not getting any remuneration from subsidiary?

Frequently asked questions

How Arms’ Length transaction can be determined?

Whether transactions to be seen in aggregate with previously

entered transaction which is less than the threshold limits?

If transactions are between holding and WOS – whether both

parent and subsidiary to pass approving resolutions?

Can approval of the Audit Committee, to a related party

transaction, be granted by passing a circular resolution?

Frequently asked questions

Will payment of commission to non-executive directors be

treated as a related party transaction?

If not, should they vacate the room where the Board meeting is

conducted while the item considering their commission is

discussed? Or can they participate on this item of agenda?

Where a director is nominated by a related party, whether the

nominee director can be present at a Board meeting where a

related party transaction is being considered?

Will remuneration by way of salary proposed to be paid to a

director amount to a related party transaction?

Thank you

ganesanca@yahoo.com/ 99401 30403