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WHO COMES UNDER THE PURVIEW OF RELATED PARTY

Under Companies Act 2013

Section 2 (76):- Related Party, with reference to a company, means

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager is a member or director;

(v) a public company in which a director or manager is a director or holds along with his relatives, more than two per cent. of its paid-up share capital;

(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;

(viii) any company which is- (exemption to private companies vide MCA Notification dated 5th June, 2015)

(A) a holding, subsidiary or an associate company of such company; or

(B) a subsidiary of a holding company to which it is also a subsidiary;

(ix) such other person as may be prescribed*;

*{a director (other than an independent director) or key managerial personnel of the Holding company or his relative with reference to a company, shall be also deemed to be a related party.} - Rule 3 of Companies (Specification of definitions details) Rules, 2014

Under SEBI( Listing Obligation and Disclosure Requirement) Regulation, 2011

Regulation 2 clause(1) sub clause (zb)

 "related party" means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards:

Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party.

Provided further that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s);

Under Companies Act 2013

(77) relative'', with reference to any person, 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) one person is related to the other in such manner as may be prescribed**;

**Rule 4 of Companies (Specification of definitions details) Rules, 2014

List of Relatives in Terms of Clause (77) of section 2

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

(1) Father: Provided that the term "Father" includes step-father.

(2) Mother: Provided that the term "Mother" includes the step-mother.

(3) Son: Provided that the term "Son" includes the step-son.

(4) Son's wife.

(5) Daughter.

(6) Daughter's husband.

(7) Brother:

Provided that the term "Brother" includes the step-brother;

(8) Sister: Provided that the term "Sister" includes the step-sister.

Under SEBI( Listing Obligation and Disclosure Requirement) Regulation, 2011

Regulation 2 clause(1) sub clause (zd)

"relative" means relative as defined under sub-section (77) of section 2 of the Companies Act, 2013 and rules prescribed there under:

Provided this definition shall not be applicable for the units issued by mutual fund which are listed on a recognised stock exchange(s);

How much do you know about RPT

TRANSACTIONS CONSIDERED AS RELATED PARTY TRANSACTION (RPT)

Related Party Transaction

Under Companies Act 2013

Section 188 read with Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014 and SEBI(LODR)Regulation, 20211

Transaction Considered as RPT

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company:

Explanation- any office or place of profit

A director can be considered as holding the office or place of profit, if director holding it receives anything from the company by way of remuneration over and above the remuneration to which he is entitled as such director

Anything – may be in the form of money or money's worth (eg. Perquisites)

Any other individual, firm, private company or body corporate can be considered as holding the office or place of profit, if it receives Anything from the company by way of remuneration.

Anything - may be in the form of money or money's worth

 

PROCEDURE TO ENTER INTO ANY CONTRACT OR ARRANGEMENT OR MATERIAL RPT WITH RELATED PARTY

  • Consent of the Board of Director at the meeting of the board by way of resolution always required irrespective of the value of transaction.
  • Prior approval of the Company required by way of resolution if the value of transaction exceed the below mentioned limits:-

Transaction(s)

Limit

 

sale, purchase or supply of any goods or materials directly or through agent(a & e)

10% or more of the Turnover*

Limit shall apply for transaction or transactions either individually or taken together with the previous transactions during a financial year

selling or otherwise disposing of, or buying, property of any kind directly or through agent(b & e)

10% or more of the Net Worth*

leasing of property of any kind

10% or more of the Turnover*

availing or rendering of any services directly or through agent(d & e)

10% or more of the Turnover*

Appointment of related party to any office or place of profit in the company, its subsidiary company or associate company

Exceeding the monthly remuneration by Rs. 2.5 Lakh

 

underwriting the subscription of any securities or derivatives thereof, of the company

Exceeding the 1% of the Net Worth*

 

* Turnover/ Net Worth shall be computed on the basis of Audited Financial Statement of the preceding FY.

For Listed Entity:

 

Transaction considered to be material if

Individually or

In a financial year

exceeds 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements)

Taken together with previous transaction

Transaction considered to be material with respect to payment brand usage or royalty if

Individually or

In a financial year

exceeds 5% of the annual consolidated turnover of the listed entity as per the last audited financial statements)

Taken together with previous transaction

Points to be noted

  • Director who is interested in any contract or arrangement with a related party shall not be present at the meeting during discussion of the subject matter of the resolution.
  • Member of the company who is related party shall not vote on such resolution but if 90% of members are relatives of promoters or are related parties then they can vote on such resolution.
  • Prior approval of the Company shall not be required if transaction entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval
  • Above mentioned procedure shall not apply to transaction entered into by the company in the ordinary course of business on arm length basis.
  • The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions including clear threshold limits duly approved by the board of directors and such policy shall be reviewed by the board of directors at least once every three years and updated accordingly
  • All material related party transactions shall require approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not:

[Provided that the requirements specified under this sub-regulation shall not apply in respect of a resolution plan approved under section 31 of the Insolvency Code, subject to the event being disclosed to the recognized stock exchanges within one day of the resolution plan being approved

ROLE OF AUDIT COMMITTEE

  • Audit Committee shall approve the transaction or any subsequent modification of transactions of the company(or listed entity) with related parties
  • Audit Committee may make omnibus approval (valid for one year) on annual basis for related party transactions proposed to be entered into by the company(listed entity)(Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company)

After obtaining approval of the Audit committee set Criteria of making omnibus approval (by considering repetitiveness of transaction and justification of need):

(a) maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year;

(b) the maximum value per transaction which can be allowed;

(c) extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;

(d) review, at such intervals as the Audit Committee may deem fit, related party transaction entered into by the company pursuant to each of the omnibus approval made;

(e) transactions which cannot be subject to the omnibus approval by the Audit Committee.

  • Audit Committee shall review annual financial statements and auditor's report with reference to disclosure of related party transaction before submission to the board for approval.
  • Audit Committee shall review statement of significant related party, submitted by management
  • where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may grant omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.
  • Audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given.

REPORTING REQUIREMENT/DISCLOSURES REQUIRED TO BE GIVEN

  • Board Report- Every transaction of Section 188(1) along with justification for entering.
  • Corporate Governance Report 27(2) SEBI (LODR) Reg- listed entity shall submit a quarterly compliance report mentioning details of all material transactions with related parties
  • Website of the Company- policy on dealing with related party transactions
  • Annual Report(in corporate governance section)- disclosures on materially significant related party transactions that may have potential conflict with the interests of listed entity at large and web-link of the policy dealing with the related party transaction. Disclosure mentioned in Schedule V of SEBI (LODR) reg.
  • Disclosure under reg 23(9) SEBI (LODR) Reg- The listed entity shall submit within 30 days from the date of publication of its standalone and consolidated financial results for the half year, disclosures of related party transactions on a consolidated basis to the stock exchanges and publish the same on its website.

CONSEQUENCES OF NON COMPLIANCE

Civil Liability

  • If without obtaining the consent of the Board or approval by a resolution in the general meeting under sub-section (1) of section 188 and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board
  • if the contract or arrangement is with a related party to any director, or is authored by any other director, the directors concerned shall indemnify the company against any loss incurred by it.
  • Without prejudice to anything contained in sub-section (3), it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement.

Criminal Liability

Any director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of the provisions of this section shall,-

(i) in case of listed company, be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both; and

(ii) in case of any other company, be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

The author can also be reached at sandhya.malhotra29@gmail.com

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Category Corporate Law, Other Articles by - SANDHYA MALHOTRA 



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