Company is an entity independent of its shareholders and board of directors. The company runs out of funds invested by shareholders. However, there is always a possibility that the company’s management or internal team may cause undue benefit to any of its relatives by entering into unfair agreements with them like selling goods at an undue low price or acquiring goods at undue high price.
Therefore, it is important for the shareholders to know what all transactions have been entered into with related parties during the year and at what price, and whether the such price is fair or not. Therefore, necessary provisions are provided under most of the Acts to deal with such transactions such as Transfer pricing norms under Income Tax, Related Party disclosure under Accounting standard, Section 188 of Companies Act, 2013, SEBI ( Listing Obligations and Disclosure Requirements), etc.
Any contract or arrangement entered into with a related party is treated as a related party transaction under the Companies Act, 2013. The Ministry of Corporate Affairs and SEBI allows related party transactions to enter into the normal course of business at a price that is applicable to other parties. However, transactions not at arm’s length price require approval of the audit committee, board, and shareholders’ approval. Therefore, it becomes essential to have internal controls within an organization to prevent abusive related party transactions and establish a robust mechanism of approvals and disclosures.
This article will give you insights into the identification, materiality thresholds, approvals, and disclosures of related party transactions given under the Companies Act, 2013 and Securities, and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred to as "Listing Regulations").
1. Meaning of related party
To identify whether an individual or entity falls within the realm of a related party or not, one must know who all are covered in the term related party.
Term related party is defined u/s 2(76) of Companies Act, 2013 and under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. As per Section 2(76) of the Companies Act, With reference to any company, the following shall be the related party:
- 取締役またはその親族
- 主要経営幹部またはその親族
- 取締役、マネージャー、またはその親族がパートナーである企業
- 非公開会社：取締役、マネージャー、またはその親族がメンバーまたは取締役である場合
- 取締役またはマネージャーが以下のいずれかに該当する非公開会社：
- 取締役である場合、または
- 親族と合わせて、当該会社の払込済資本の2%超を保有している場合
- 取締役またはマネージャーの助言、指示、または指図（専門的な立場で与えられたものを除く）に従うことが常態となっている取締役会、マネージング・ディレクター、またはマネージャーを有する法人
- 取締役またはマネージャーがその助言、指示、または指図（専門的な立場で与えられたものを除く）に従うことが常態となっている者
- 親会社、子会社、または関連会社
- 親会社の別の子会社。例：A社がB社およびC社の親会社である場合、B社とC社は関連当事者となります。
- 会社に出資している法人（投資会社またはベンチャー企業）
- 規定された者、すなわち独立取締役以外の取締役、または親会社の主要経営幹部もしくはその親族は、会社に関連して関連当事者とみなされます。
Further, as per Section 2(1)(ZB) of the SEBI Act, in addition to the above-mentioned parties, the following parties are also considered related parties:
- 2022年4月1日以降、持株比率にかかわらず、会社のプロモーターおよびプロモーターグループの全メンバー。
- 直前の会計年度中のいずれかの時点で、直接または受益権ベースで、会社の株式の20%（2023年4月1日より10%）以上を保有する個人または法人。
“Relative” means anyone who is related to another, if—
- ヒンドゥー教の未分割家族のメンバーである場合
- 夫婦である場合
- 父（継父を含む）、母（継母を含む）、兄弟（継兄弟を含む）、姉妹（継姉妹を含む）、息子（継子を含む）、息子の妻、娘、娘の夫という関係にある場合
2. Identifying Related party transactions
As per Section 188 of the Companies Act, 2013, the following transactions are categorized as related party transactions when entered into with a related party by any company—
- 商品または材料の販売、購入、または供給
- あらゆる種類の財産の売却もしくはその他の処分、または購入
- あらゆる種類の財産のリース
- サービスの利用または提供
- 商品、材料、サービス、または財産の売買のための代理人の任命
- 会社、その子会社、または関連会社における、当該関連当事者の役職または利益のある地位への任命
- 会社の証券またはそのデリバティブの引受け
In addition to the above, as per Regulation 2(1)(zc) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, related party transaction means a transfer of resources, services, or obligations between:
- 一方の上場企業またはその子会社と、他方の上場企業またはその子会社の関連当事者との間、または
- 一方の上場企業またはその子会社と、他方のその他の個人または法人との間で、その目的および効果が上場企業またはその子会社の関連当事者に利益をもたらすもの
3. Approvals required for related party transactions
Following approvals are required in terms of provisions of Section 188 of Companies Act, 2013 read with Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014 and listing regulations:
(i) Board of directors’ approval
- No related party transaction shall be entered by the company without prior approval of the Board of Directors.
- However, no such approval is required when a transaction is entered into by the Company in the ordinary course of business at arm’s length price.
(ii) Shareholders’ approval
- Where a related party transaction does not occur in the normal course of business or is not at an arm’s length price and the value of the transaction exceeds the materiality threshold under the Companies Act, 2013, shareholders’ approval via resolution is required.
- In the case of a listed company, where a related party transaction exceeds the materiality threshold under listing regulations will also require shareholders’ approval.
(iii) Audit Committee’s approval
- As per Regulation 18 of SEBI (Listing Obligations and disclosure requirement) regulations, 2015, every listed company is required to form an audit committee consisting of a minimum of 3 directors.
- At least 2/3rd of the members of the audit committee shall be independent.
- All members of the audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise
- In the case of listed companies, prior approval of the audit committee is required in the following cases:
- a related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party and the value of such transaction (whether entered into individually or taken together with previous transactions) exceeds 10% of the annual consolidated turnover, as per the last audited financial statements
- with effect from April 1, 2023, a related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year, exceeds 10% of annual standalone turnover.
(iv) Exceptions for approvals
- Approval of the board of directors and prior approval of the shareholders is not required when such related party transaction is in the ordinary course of its business and on an arm's length basis.
- prior approval of the shareholders and audit committee of a listed entity will not be required if the subsidiary of such listed entity is itself a listed company to which the RPT framework under the listing regulations applies
4. Materiality threshold for related party transactions
Prior approvals are necessary in case of related party transactions. However, if approval is required in all the case then carrying out business will be difficult, Therefore, the Companies Act and SEBI have granted some threshold relaxations below which no approval is required from shareholders.
Following are the exemption thresholds:
- Companies Act, 2013
| Transaction |
Threshold Limit |
| (a) Sale, purchase, or supply of any goods or materials. |
10% or more of the turnover of the company. |
| (b) Selling, disposing, or buying property of any kind (direct or through agent). |
10% or more of the turnover of the company. |
| (c) Leasing of any kind of property. |
10% or more of the turnover of the company. |
| (d) Availing or rendering of any services (direct or through agent). |
10% or more of the turnover of the company. |
| (e) Appointment to any office or place of profit in the company, its subsidiary, or associate. |
Monthly remuneration exceeding ₹2.5 lakh. |
| (f) Underwriting the subscription of any securities or derivatives. |
1% of the net worth of the company. |
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
- Under SEBI, a transaction with the related party will be considered as material if transactions entered into individually or taken together with previous transactions during a financial year exceeds, lower of the followings:
- INR 1000 Crores or
- 10% of consolidated turnover of the listed entity as per the last audited financial statements
- Further, a transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed 5% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.
5. Disclosures for related party transactions
(i) Disclosures for related party transactions in Board’s report
- Every contract or arrangement entered into by the company shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.
- The particulars of related party transactions which are not on an arm’s length price and material-related party transactions which are on arm’s length price will be reported in AOC-2.
(ii) Disclosures for related party transactions In the register of contracts or arrangements
Every company is required to record details of related party transactions in the register in Form MBP-4.
(iii) Disclosures for related party transactions to stock exchanges for listed companies
A listed entity is required to disclose details of related party transactions on a consolidated basis in a prescribed format, to the stock exchanges, and on its website, within 30 days (15 days from 1st April 2022 and simultaneously with the release of financial results from 1st April 2023) from the date of publication of the standalone and consolidated financial results for the half year.
(iv) Disclosures for related party transactions in the annual report for listed companies
A listed company is required to make the disclosures for related party transactions in an annual report in the corporate governance section.
6. Annual action points for related party transactions
- Obtain disclosure of interest by directors or key managerial personnel on their appointment or any change thereafter at board meetings.
- Obtain a list of related parties from subsidiaries (ies) of listed entities.
- Listed companies should formulate a policy on related party transactions containing processes to identify, review and approve related party transactions.
- Monitor and update regularly the policy on related party transactions.
- Disclose policy on related party transactions on the website of the company.
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