Related Party Transactions under Companies Act 2013

[Section 188 and Rule 15 of Companies (Meeting of Board and its Power) Rules, 2014]- Related Party Transactions:

As per Section 2(76) of the Companies Act, 2013, Related party include-

i) Director or its relative

ii) KMP or its relative

iii) any Firm in which Director is a partner

iv) any Private Company in which Director is a Director or Member

v) any Public Company in which Director is a Director and additionally hold alongwith its relative 2% or more of paid up share capital of Public Company

vi) with Subsidiary Company

vii) with an associate Company

viii) With a Body Corporate which significantly influences a Director of Company

ix) with a person who significantly influences a Director of Company

x) with a person who has control or significant influence over Company

xi) Such other person as may be prescribed.

Related Party Transactions alongwith limit-
  1. Sale, purchase or supply of any goods or materials : (10% Turnover or more)
  2. Selling, buying or disposing of any property : (10% Networth or more)
  3. Leasing of property of any kind : (10% Turnover or more)
  4. Availing or rendering of any services : (10% Turnover or more)
  5. Appointment of any agent for purchase, sale of goods, materials, services or property : (10% Turnover or more)
  6. Related party appointment to any office or place of profit in the Company, its Subsidiary or Associate Company : (Rs. 2,50,000 P.A.)
  7. Underwriting the Subscription of any Securities or derivatives of the Company : (1% of Networth)
Contract and Arrangement U/S 188 of Companies Act, 2013
  • If contract and Arrangement is below or up to threshold- BR in Board Meeting
  • If contract and arrangement is above threshold- BR in Board Meeting + OR in General Meeting
  • If company is required to constitute Audit Committee- Approval of Audit Committee U/S 177(4) is required to enter into such transactions in addition to BR or OR, as the case may be

If approval of Board or prior approval of Shareholder not obtained– Needs to be ratified within 3 months from the date of contract/arrangement.

Note: No Board and Shareholder Approval is required for related party transaction done in ordinary course of business and on arm’s length basis.

Exemption from Related Party Transactions

Exemption of obtaining shareholders resolution is only granted to transactions entered into between a holding company and wholly owned subsidiary companies. Hence, approval of Board and Audit Committee shall still be required.

Relative means-

Any one who is related to another, if—

(i) they are members of a Hindu Undivided Family

(ii) they are husband and wife, or

(iii) A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:-

(a) father (including step father)

(b) mother (including step mother)

(c) son (including step son) and his wife

(d) daughter and his husband

(e) brother (including step brother)

(f) sister (including step sister)

Register of Contract/Arrangement with Related Party is maintained in Form MBP-4.
Contravention of Section 188

• Punishment for violation of provisions of the section 188 –

▫ Listed Company–Fine Rs. 25 lakhs

▫ Any other company-Fine Rs. 5 lakhs

▫ Penalty on any director or employee who enters into or authorizes the contract in contravention of provisions of the section

▫ Punishment levied even if no loss has been incurred by Company from such RPT.