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Introduction:
The concept of related party under Section 188 was introduced in Companies Act 2013, to increase the transparency and to keep a vigilance upon all the transactions, and to have
enhanced accountability for key management of related party transaction. It is very important to consider all the aspects before entering into any related party transactions and what all approvals are required. In this article we are going to analyse the aspects related to related party transactions.
Meaning of related party:
As per the provisions of Section 2(76) of the Company’s Act 2013 related party, with reference to a company, means:
| S. No. | Related Parties |
| 1. | A director or his relative |
| 2. | Key managerial personnel or his relative |
| 3. | A firm in which a director, manager, or relative is a partner |
| 4. | A private company in which a director, manager, or 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 2% of its paid-up capital |
| 6. | Body corporate whose board of directors, MD or manager are required to act in accordance with the advice, directions of a director or manager (In cases these directions are given in professional capacity – NA) |
| 7. | Any person on whose advice, directions a director or manager is required to act ((In cases these directions are given in professional capacity – NA) |
| 8. | Any body corporate which is:
a) Holding, Subsidiary or Associate of such company b) Any company which is subsidiary of a holding company to which it is also a subsidiary c) an investing company or the venturer of the company |
| 9. | a director (Excludes independent director or) key managerial personnel of the holding company or his relative with reference to a company, |
Related party transactions:
Section 188 of the Companies Act, 2013 and Rule 15 of The Companies (Meetings of Board and its Powers) Rules, 2014 specifies the related party transactions and necessary compliance requirement.
Boards’ Approval
If any company enters into any contract or arrangement with related party with respect to the specified transactions, they have to pass a board resolution regarding the same. The board meeting shall be conducted and the agenda of the meeting shall disclose all the factors determining the related party transaction.
Shareholders’ Approval
No company shall enter into any specified transactions except with the approval of shareholder by passing an ordinary resolutions where paid up share capital and transactions exceeds the prescribed limits.
Related Party Transactions which require shareholders’ approval
The networth and turnover shall be computed on the basis of audited financial statement of previous year.
| S.No. | Contracts/Transactions | Threshold Limit |
| 1 | Sale, purchase or supply of any goods or materials or through agents | 10% or more of turnover |
| 2 | Leasing of property of any kind | 10% or more of turnover |
| 3 | Availing or rendering of any services or through agents | 10% or more of turnover |
| 4 | Selling or otherwise disposing of, or buying, property of any kind or through agents | 10% of the networth of the company |
| 5 | Any related party appointment to any office or place of profit in the company, its subsidiary company or associate company | Monthly remuneration exceeding Rs. 2.50 Lakhs |
| 6 | Underwriting the subscription of any derivatives or securities of the company | Remuneration exceeding 1% of the net worth |
The networth and turnover shall be computed on the basis of audited financial statement of previous year.
Exemption from related party compliance
- Transaction carried out in ordinary course of business
- Transactions are carried out on arms’ length basis.
- Any type of transactions carried out between holding company and its wholly owned subsidiary whose accounts are consolidated and kept for approval in annual general meeting.
