Related Parties as Per Companies Act 2013

Related parties are connected with a firm/company in other ways than their own transactions. Usually, directors/key managerial personnel or such companies in which the director/key managerial personnel is a partner are considered as related parties.

What is the Meaning of Related Party?

According to the Companies Act 2013, related party in a company refers to as –

• A director or his relative.
• Key managerial personnel or his relative.
• A firm, in which a director/manager or his relative is a partner.
• A private company in which a director/manager is a member or director.
• A public company in which a director/manager is a director or holds more than 2% of paid-up share capital.
• Any person on whose advice, directions or instructions a director or manager is accustomed to act.
• A holding, subsidiary or an associate company of such company
• Any body corporate whose Board of Directors, managing directors or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager.

What are Related Party Transactions?  

These transactions need the approval of the Board by passing resolutions in a respective company as per companies act 2013.

• Sale, Purchase or Supply of goods or material directly or through an agent covering more than 10% of turnover.
• Selling, buying or leasing of a property either directly or through an agent more than 10% of the net worth.
• Related Party’s appointment to any office or place of profit in the company, its subsidiary or associate company in which the remuneration exceeds Rs. 2,50,000.
• Underwriting the securities of a company or derivatives where the remuneration exceeds 1% of the net worth.
• Availing or rendering of any services either directly or through an agent which amounts to 10% or more of the turnover.

There is no need to get approval via a special resolution for the transactions between holding and its subsidiary company.

Role of RC-49 and SEBI

Securities and Exchange Board of India (SEBI) also states several provisions related to the related parties. It defines the related party transactions as transfer of resources, services or obligations between a company and a related party.

Here are a few important points that you need to consider in case of related party transactions.

• Every related party transaction requires prior approval of the audit committee of the respective company.
• All material related party resolutions to be approved by the shareholders through a special resolution.
• To claim exemption from special resolution of disinterested shareholders the transactions have to be in the ordinary course of business and at arm’s length or below the prescribed threshold.
• The Board also needs to approve all the material related party transactions entered into by a listed company.
• The Audit Committee of the company may allow omnibus approval (valid for 1 year) for a transaction not exceeding Rs. 1 Crore.  
• If the transactions are above the threshold level, then it needs to be disclosed in the General Meeting for approval of special resolution.

Related Party Disclosure

There are different provisions which a company needs to follow in order to disclose its related parties.  

• The company needs to upload its policies for dealing with the related parties and also in its annual report.
• Details of all the material related party transactions on a quarterly basis along with the compliance report on corporate governance.
• The senior management needs to disclose all the materials, financial and commercial transactions.

Penalties

The Ministry of Corporate Affairs has proposed punishments/penalties in case these provisions are not fulfilled by any company.

In case of a listed company, the director or any other employee shall be punishable with imprisonment of up to 1 year or, a fine of not less than Rs. 25,000 which can be extended up to Rs. 5 lakh or both.

In case of any other company, a fine of not less than Rs. 25,000 which can extend up to Rs. 5 Lakh.

Bonus Points

• To claim exemptions from special resolution of disinterested shareholders the transactions has to be in the ordinary course of business and at arm’s length or below the prescribed threshold.
• The turnover or net worth for the purpose of calculation shall be based on the audit of the financial statements.
• No member shall vote on the special resolution if such member is a related party.
• Details of every contract should be referred in the Board’s report along with jurisdiction of the same.  
• Signing of the transactions may be done by the Board or shareholders within 3 months.
• If the transactions are above the threshold limit, then they need to be disclosed in the General Meeting for approval by special resolution.