Related Party under Company Act 2013

This article makes a fair attempt to analyze the concept of related party transactions under the Companies Act, 2013, as contained in Section 188 read with the relevant rules.

The Companies Act, 2013 has brought in numerous disclosure norms along with it rather than just regulatory approvals. One such major area is “Related Party Transactions”. While the Companies Act, 1956 warranted that Central Government approved related party transaction conducted by companies under large cap category as per the Companies Act, 2013. 

As per the Companies Act, 2013, the overall concept of the related party transactions has been very pin-pointedly covered within a single section named Section 188 which effectively connects the Sections 314 and 297 as per the Companies Act, 1956 and it also contains numerous provisions that are contained within its scope. This section is deeply layered with many sets of provisions and leaves the mind perplexed with its scope and coverage.

Below, we are going to explore the concept of related party transactions under the Companies Act, 2013 as contained in Section 188 read with the relevant rules made thereunder

Analysis of Section 188 as per Companies Act, 2013 read with Rule 15 of Companies Rules, 2014

Section 188 is placed in “Chapter 12 – Meeting of Board and its Powers”. Section 188 demands a concerned company to mandatorily obtain the desired approval of the company’s Board and also of the members, in certain circumstances, before entering into any transaction or any agreement with a related party. A complete analysis of Section 188 demands understanding of the following:

•  Section’s applicability
•  Related Party’s formal definition

Here is a brief on understanding the above provisions.

Section’s Applicability

Section 188’s applicability holds for both private as well as public companies, and it is applicable starting from 01.04.2014

Related Party’s Definition

Section 2(76), read with rule 3 of Companies (Specification of definitions details) Rules, 2014, defines a related party as under:

“Related party”, when defined in context to a company, means

• The director of the concerned company or either her/his relative;
• An important personnel from the managerial cadre of the company or either his relative;
• A private company where a director, top manager or his/her relative has a status of a partner;
• A private company where a director or manager is a member or director;
• A public company where a director or manager is a director or holds along with his relatives, greater than 2% of its paid-up share capital;
• Any corporate body whose Board of Directors, MD or manager is highly accustomed to the act in accordance with the desired advice, directions or instructions of a director or manager;
• Any person on whose advice, the directions or instructions a director or manager is accustomed to act.