“Related Party Transactions” (RPT) under Companies Act, 2013.

It’s not uncommon that every company in its day-to-day business enters into various
transactions with parties with whom they are related or have common interests. Although such
transactions are themselves legal, they may create conflicts of interest or impel other illegal
situations and can impact the financial position of the company. Therefore, in order to protect
the interest of stakeholders and maintain transparency in business such kind of transactions
with Related Parties are being regulated.
Section 188 of the Companies Act, 2013 (the Act) specifically deals with Related Party
Transactions which further captivate other provisions of the Act including Section 166, 173, 177,
and 184. In this article, an attempt is made to explain and amplify the coverage, scope, and
intent of ‘Related Party Transactions.
Related Party
In order to understand Related Party Transaction, first we need to identify who are the related
parties, Section 2(76) read with Rule 3 of Companies (Specification of definitions details) Rules,
2014 of the Act defines related parties.

Related party with reference to a company means:

1. a director or key managerial personnel or relative thereof;
2. a firm, in which a director, manager, or his relative is a partner;
3. a private company in which a director or manager or his relative is a member or director;
4. a public company in which a director or manager is a director AND holds along with his
relatives, more than two percent of its paid-up share capital;
5. (a) 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.
(b) any person on whose advice, directions, or instructions a director or manager is
accustomed to act.
However, nothing contained in clauses (a) and (b) shall apply to the advice, directions or
instructions given in a professional capacity.
6. holding, subsidiary, or an associate company of such company.
7. subsidiary of a holding company to which it is also a subsidiary.
8. investing company or the venturer of the company.
Director or KMP of Subsidiary or Associate or Fellow Subsidiary - Not a related party.

 A LLP in which the Director is a Partner - Not a related party.

 Fellow Associate, Subsidiary’s associate or Fellow Subsidiary’s associate or Associate’s
associate - Not a related party.
 A person on whose instructions the board of a company is accustomed to act, also has
similar influence over the board of another company - Not a related party.
Related Party Transaction
Not all transactions with related parties are construed as related party transactions, the Act has
provided an exhaustive list of such transactions, let us examine that.
Provisions regarding Related Party Transaction are encapsulated under 188 of the Companies
Act, 2013 (“the Act”) read with rule 15 of the Companies (Meetings of Board and its Powers)
Rules, 2014 which provides that a company cannot enter into any contract or arrangement with
a related party except with the prior approval of Board or Shareholders as the case may be with
respect to following transactions :

Related Party Transactions u/s 188 which Limits of Transactions exceeding which
requires prior approval of the Board of approval from the shareholders is required
Directors
Sale, purchase, or supply of any goods or 10% or more of the turnover of the Company
material, directly or through the appointment
of any agent
Selling or otherwise disposing of or buying 10% or more of the Net Worth of the
property of any kind, directly or through the Company
appointment of agent

Leasing of property of any kind 10% or more of the turnover of the Company

Availing or rendering of any services, directly 10% or more of the turnover of the Company
or through the appointment of agent
Such related party’s appointment to any at a monthly remuneration exceeding Rs.
office or place of profit in the Company, its 2,50,000/-
subsidiary or associate Company
Underwriting the subscription of any 10% or more of the Net Worth of the
securities or derivatives thereof, of the Company
company

All the above limits are to be taken on all transactions are done on a financial year basis.
Note: The turnover or net worth shall be taken on the basis of the Audited Financial Statement
of the preceding financial year.
“office or place of profit” means any office or place where such office or place is held by
a) Director and he receives from the company anything by way of remuneration over and above
the remuneration to which he is entitled as director, by way of salary, fee, commission,
perquisites, any rent-free accommodation, or otherwise;
b) an individual other than a director or by any firm or private company or other body
corporate, if they receive from the company anything by way of remuneration, salary, fee,
commission, perquisites, any rent-free accommodation, or otherwise.
Requisite approvals required for Related Party Transactions (RPT)
Once we have identified the RPT, we need to check what kind of approval is required to execute
the RPT under the Act and whether there is an exemption for it.
Approval from Board
Whenever a Company enters into any Related Party Transaction u/s 188 up to limits mentioned
above, prior approval by way of resolution from the Board of Directors of the Company will be
required. [Section 188(1)]
Provided that, If a director is interested in any contract or arrangement with a related party,
such director shall not be present at the meeting during discussions on such resolution. [Rule
15(2)].
However, if a contract or arrangement falls under the ambit of Section 184(2) where a Director
is interested other than contract or arrangement referred in Section 188(1), in that case, the
director can participate in the Resolution in the following cases:

 In case of a Private Company or Specific IFSC Company after disclosure of interest.

 In case Section 8 Company where transaction amount does not exceed Rupees 1 lakh.
Here, it can be noted that exemption under Section 184(2) is provided while, no exemption is
provided from Rule 15(2) which means that in the case of RPT where all directors are
interested in the matter or where quorum can not be formed u/s 173, such company needs to
take approval from shareholders in General Meeting but what about a private company
where interested directors themselves holds majority shares in the company? Does that mean
in that case also we need to take the matter to the General Meeting only.
Approval from Shareholders
Whenever a Company enters into any Related Party Transaction exceeding the limits mentioned
above it needs to take approval by way of resolution from the shareholders of the Company.
However, a member of a company who is a related party cannot vote on such resolution for the
approval of RPT in General Meeting except:
(i) in case of Private Company and Specified IFSC Public Company [exempted vide MCA
Notification dated 5th June 2015 and 4th January 2017]
(ii) in a company where 90% or more members are relatives of promoters or are related
parties. [3rd Proviso to Section 188(1)]
Exemptions : Further, in order to ensure smooth functioning in the company, certain
exemptions from taking approval either from Board or Shareholders are provided under the
Act:

 No approval will be required (from Board/ shareholders) in case transaction is

entered into by the company is in ordinary course of business AND on an arm’s
length basis.
Note: arm’s length transaction means a transaction between two related parties that is
conducted as if they were unrelated so that there is no conflict of interest.

 Transactions entered into between a holding company and its wholly-owned

subsidiary whose accounts are consolidated do not require approval from
shareholders even if it exceeds the limit and resolution passed by the holding
company will be sufficient for the purpose of entering into the transaction.
Note: If a company avails of the exemption provided in Rule 6 of the Companies (Accounts)
Rules, 2014 read with Section 129(3) of the Act, and does not consolidate accounts of its
subsidiary, then it will not be entitled to avail the aforesaid exemption from obtaining
approval of the shareholders.

 in the case of a Government company no approval is required from shareholders

even if it exceeds the limits:
(i) Where contracts or arrangements entered into by it with any other Government
company, Central or State Government or combination thereof.
(ii) Where it’s an unlisted government company and takes approval from concerned
ministry. [exempted vide MCA Notification dated 02nd March 2020]
Consequences of non-compliance
(i) In case RPT was entered into by a director or any other employee without obtaining the
requisite approval(s), such RPT needs to be ratified by the Board or Shareholders as the case
may be within 3 months otherwise they have to bear the following consequences:

 such RPT shall be voidable at the option of the Board /Shareholders.

  If such RPT is with a related party of the director or where it is authorized by any
director, the director(s) concerned shall indemnify the Company against any loss
incurred by it.
 Moreover, a company can proceed against such a director or any other employee for
recovery of any loss sustained by it as a result of such RPT.
(ii) Any director or any other employee, who had entered into or authorized RPT in violation of
the provisions of section 188 of the Act, shall be liable for a penalty-

 In case of Listed Company-25 lakh rupees

 In case of any other company- 5 lakh rupees
(iii) Any Director convicted in the offense of dealing with related party transactions
under section 188 will become disqualified from being appointed as Director in a
company for a period of 5 years and will be liable to vacate the office of director.
[Section 164(1)(g) and Section 167(1)(a)]

The following transactions are exception to related party transactions:

 Transactions undertaken in ordinary course of business.
 Transactions arising out of restructuring, mergers or acquisition.
 Transactions entered between holding and its wholly owned subsidiary company duly
approved by shareholders.

RELATED PARTY RELATIONSHIP (clause 9(b)(i)

Entity and RE are members of same Group (Same Group = Parent, Subsidiary & Fellow Subsidiary)

HOLDING REPORTING
SUBSIDIARY
COMPANY ENTITY

FELLOW
SUBSIDIARY
The entity is controlled or jointly controlled by a person who has control or joint control of the
reporting entity

PERSON B PVT. LTD

A LTD
“A”

REPORTING
ENTITY
The following transactions do not fall within the ambit of Related Party Transactions

Related party Related party

REPORTING B PVT LTD

A LTD
ENTITY

SUBSIDIARY

RELATED PARTY