MEANING OF 'RELATED PARTY'
3. Section 2(76) of the 2013 Act defines 'related party' as follows:
"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 under 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 (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
Key Managerial Personnel (KMP) - "Key managerial personnel", in relation to a
company, means (i) the Chief Executive Officer or the Managing Director or the
Manager (ii) the Company Secretary (iii) the Chief Financial Officer; and (iv) such other
officer as may be prescribed [section 2(51) of the 2013 Act]
Relative - "Relative" means a person who is a relative of 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 [section 2(77) of the 2013 Act
- Corresponding sections 2(41), 6 and Schedule IA of the 1956 Act]
Definition of 'relative' in the 1956 Act contained some 22 relations. Similar list may be
prescribed under rules made under the 2013 Act.
Interested director - "Interested director" means a director who is in any way,
whether by himself or through any of his relatives or firm, body corporate or other
association of individuals in which he or any of his relatives is a partner, director or a
member, interested in a contract or arrangement, or proposed contract or arrangement,
entered into or to be entered into by or on behalf of a company [section 2(49) of the 2013
Act]
Associate Company - "Associate company", in relation to another company, means a
company in which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes joint venture
company.Explanation For the purposes of this clause, "significant influence" means
control of at least twenty per cent of total share capital, or of business decisions under an
agreement [section 2(6) of the 2013 Act].
Control - "Control" shall include the right to appoint majority of the directors or to
control the management or policy decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly, including by virtue of their shareholding
or management rights or shareholders agreements or voting agreements or in any other
manner [section 2(27) of the 2013 Act]
TWO PUBLIC COMPANIES 'RELATED PERSON' EVEN IF JUST ONE
DIRECTOR COMMON
4. Clause (v) of section 2(76) uses the words 'or', with the result that two public
companies become 'related party' even if one director is common. This does not seem to
be intention as section 184 of the 2013 Act about disclosure applies only when director
has 2% or more shareholding in a public company.
STRANGE RESULTS DUE TO RULE BASED DEFINITION
5. Definition of 'related party' is rule based and not principle based. Such definition can
sometimes lead to absurd results.
For example, Mr. Mukesh Ambani and Mr. Anil Ambani may not be on speaking terms,
but the biological fact that they are brothers cannot be denied. Hence, they become
'related party' as per rule based definition, though ground realities may be quite
different.
It is also possible to manipulate the provisions so that though they are related parties,
they do not fit in the definition of 'related party'. One crude way of doing this is to
appoint clerks, drivers and peons as directors (and even shareholders).
Though such directors can come within the clause 'any person under whose advice,
directions or instructions a director or manager is accustomed to act', this becomes
difficult to prove. Of course if a director admits that he is acting on advice and directions
of another person, he is surely violating all his duties as a director.
