Classification of Related Party Transactions as per Companies Act: RPTs specified under Section 188(1) of the Act:

Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—

(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:

Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution:

Provided further that no member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party:

Provided also that nothing contained in the second proviso shall apply to a company in which ninety per cent or more members, in number, are relatives of promoters or are related parties:

Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.

Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions 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:

Explanation. — In this sub-section, —

1. the expression “office or place of profit” means any office or place—
2. where such office or place is held by a director, if the director holding it 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;
3. where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
4. the expression “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.

Identification of Related Parties as per Companies Act

Before entering into any transaction with the related party, it is important to identify the Related Parties (as defined under section 2(76) of the Companies Act, 2013).

Section 2(76) of the Act reads as follow:

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 or his relative is a member or director;

(v) a public company in which a director or manager is a director and 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 body corporate which is*—

1. a holding, subsidiary or an associate company of such company;
2. a subsidiary of a holding company to which it is also a subsidiary; or
3. an investing company or the venture of the company;

Explanation. —For the purpose of this clause, “the investing company or the venture of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.

* In case of private company – Sub-clause (viii) of clause 76 of Section 2, Shall not apply with respect to section 188.

(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 deemed to be a related party).

Disclosure requirements

• The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-
• • the name of the related party and nature of relationship;
  • the nature, duration of the contract and particulars of the contract or arrangement;
  • the material terms of the contract or arrangement including the value, if any;
  • any advance paid or received for the contract or arrangement, if any;
  • the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
  • whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
  • any other information relevant or important for the Board to take a decision on the proposed transaction.

• The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section 101 shall contain the following particulars, namely: –
• • name of the related party;
  • name of the director or key managerial personnel who is related, if any;
  • nature of relationship;
  • nature, material terms, monetary value and particulars of the contract or arrangements;
  • any other information relevant or important for the members to take a decision on the proposed resolution.

•   Disclosure in the Board’s Report (in Form AOC-2) which inter alia includes:
  • reference of contract or arrangement with related parties;
  • justification for entering into such a contract or arrangement; and
  • additional disclosures as per the Accounts Rules.

• Disclosure as per SEBI (LODR)
  • 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, in the format specified in the relevant accounting standards for annual results to the stock exchanges and publish the same on its website;
  • policy on dealing with RPTs to be disclosed on website and a web link thereto shall be provided in the annual report;
  • details of all material transactions with related parties shall be disclosed quarterly along with the compliance report on corporate governance.

• Disclosure as per Accounting Standards

• • name of related party;
  • nature of relationship;
  • nature of the transaction;
  • amount of transaction
  • volume of the transaction;
  • any other elements necessary for understanding the financial statements;
  • amounts outstanding and provision for doubtful debts;
  • amounts written off or written back; and
  • remuneration paid to KMPs.

Consequences of non-compliance of section 188

• If there is any contract or arrangement which is not approved by the board of directors or ordinary resolution and the company has entered into any such transactions with its related parties then in that case-
• If such transactions are not ratified by the board or the shareholders in its meeting within 3 months from the date of entering into such contract or arrangement then such contract or arrangement shall become voidable at the option of the board. So, if the board want it can declare such contract or arrangement void.
• Any director entering into any contract or arrangement in contravention to section 188 can also be disqualified to be a director for a period of 5 years.
• The company can also proceed against such director or manager who had entered into such contract or arrangements in contravention to the provision of the section.
• If the company is listed company then the director or manager acted in such contravention shall be punished with imprisonment which may extend to 1 year or with a fine of Rs. 25,000/- which may extend to Rs. 5,00,000/-, or both.
• If there is any other company then, such manger or directed acted in contravention to the provision of a section shall be punishable with fine of Rs. 25,000/- that may extend to Rs. 5,00,000/-.