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In business environment it is impossible to avoid business transactions with related parties (RPT).
In one way or the other there would be a related person, at least in a few transactions for every
company. Therefore, the Companies should be mindful of regulatory aspect governing RPT under
the ambit of Companies Act, 2013 (the Act), Income Tax Act, 1961 and transfer pricing guidelines
thereunder. All RPTs are not prohibited but they are regulated and subject to scrutiny the Board /
Audit Committee, Shareholders and taxation authorities. The erstwhile requirement of obtaining
Regional Directors approval for entering into RPT has been done away with but a higher
obligation has been imposed upon the Board to ensure that RPT are entered in accordance with
the approval of the Board and reported in the Financial Statements and Directors Report. The
provisions relating to RPT apply to every company, be it a private, unlisted public, listed public or
foreign company.
In order to understand Related Party Transaction (RPT), it is essential to first understand the
meaning of Related Party, from the perspectives of listed company, unlisted public companies
and private companies. The Listing Agreement defines Related Party as defined in Sec.2(76) of
the Act. Therefore, there is no difference in definition of related party between Unlisted Public
Companies vis--vis Listed Company. However, for Private companies certain exemptions have
been issued.
Sec. 2(76) of the Act defines Related Party as follows:
Related Party, with reference to a Company, means:
(i)
(ii)
(iii)
(iv)
(v)
a public company in which a director or manager is a director and2 holds along with his
relatives, more than two per cent. of its paid-up share capital;
(vi)
(vii)
(viii)
1 Amended by Companies (Removal of Difficulties) Sixth Order dated July 24, 2014
2 Or has been replaced with And by Companies (Removal of Difficulties) Fifth Order published on
July 9, 2014
Mr. C
Mr. C
Director / KMP
Relative
Partner
PQR
firm
Partner
Relative
Mr. A
Case 2 Firm
Mr. D
Director / Manager
Co.
Compan
y
Mr. C
Shareholder*
Director / Member
Mr. A
Director / Member
XYZ
Ltd.
XYZ
Ltd.
Director *
Relative
Relative
Mr. C
Mr. D
Director / Manager
Compan
y
Director / Manager
Compan
y
Any Body
XYZ
Ltd.
Any
Any
Person
Director / Manager
Mr. A
Compan
y
Director / Manager
Person*
Compan
y
Corporate*
or
manager
is
accustomed
to
act
in
Case 8
Holding Co
Relative Mr. C
Holding Co.
Compan
y
Compan
y
Associate
Co.
Subsidiary
Co.
Fellow
Subsidiary
Subsidia
ry
Note:
For Private companies under case 8, parties shall be considered as related party if there are
common directors in Company and Associate Co. / Subsidiary Co. / Fellow Subsidiary / Holding
Co.
Covered transaction
Holding structure
After having understood the meaning of Related Party, it is essential to understand the Related
Party transactions which the Act envisages to regulate and are subject to approval of the Board /
Shareholders.
Transactions covered under Related Party Transactions (RPT) ambit
The Act specifies that all related party transactions which are not in the ordinary course of
business or which are not entered into on arms length basis are subject to the approval of
Board / Audit Committee and members of the Company. Sec. 188(1) specifies the following
transactions which are treated as related party transactions:. Further, Rule 15 of Companies
(Meeting of Board and its Powers) Rules, 2014 specifies ceilings beyond which transactions are
Transactions
Ceilings*
No.
1
crores,
whichever is lower
2
kind;
Company
crores,
or
Rs.100
whichever
is
lower
3
of
Company
crores,
or
the
Rs.100
whichever
is
lower
4
whichever
is
lower
5
Rs.100
crores,
whichever is lower
6
At
monthly
remuneration exceeding
Rs.250,000/-
*Turnover or Net worth shall be computed on the basis of the audited financial statements of
4 Changed from Special Resolution to Resolution by Notification No. GSR 971(E) dated
December 14, 2015 i.e. approval by way of an ordinary resolution of shareholders is required.
(ii)
are subject to the approval of the Board of Directors and prior approval of the shareholders of the
Company by way of ordinary resolution. The transactions which are in the ordinary course of
business and on arm length basis does not require approval of either the Board or the
Shareholders, under Sec. 188 of the Act.
Take note at
the Board
No approval of the
Board
or
Shareholders
is
required
Exceeding the
specified limits /
Boards
approval
Boards
approval
Sharehold
ers
Omnibus Approval of Related Party transactions by Audit Committee
(For Listed and unlisted public companies)
As discussed above, section 188 of the Companies Act, 2013 deals with related party
transactions and requires approval of members by means of an ordinary resolution in case such
transactions are beyond particular thresholds as prescribed by Rule 15 of the Companies
(Meetings of Board and its Powers) Rules, 2014, as amended from to time. Related party
transactions which are in the ordinary course of business and are at arms length are exempted
from such approval requirements.
However, as per Section 177(4)(iv) of the Act, in case of companies which mandatorily need to
have audit committee, audit committee will approve all related party transactions or any
subsequent modification of such transactions with related parties.
Listed companies already had the advantage of omnibus approval policy due to provisions of the
Listing Regulations (and prior to that due to Clause 49), however, certain other public companies
maximum value of the transactions, in aggregate, which can be allowed under the
omnibus route in a year;
(ii)
(iii)
extent and manner of disclosures to be made to the Audit Committee at the time of
seeking omnibus approval;
(iv)
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;
(v)
transactions which cannot be subject to the omnibus approval by the Audit Committee;
and
(ii)
(iii)
(iv)
the indicative base price or current contracted price and the formula for variation in the
price, if any, and
(v)
However, where the need for related party transaction cannot be foreseen and aforesaid details
are not available, Audit Committee may provide for approval of such transactions in omnibus
approval policy subject to their value not exceeding Rs. 1,00,00,000 (Indian Rupees One
Crore) per transaction. The transactions related to selling and acquiring of undertakings is not
covered under Omnibus approval route.
Validity of approval
The omnibus approval shall be valid for a period of one financial year and shall require fresh
approval of the Audit Committee after the expiry of financial year.
Governance Structure for Related Party transactions (Listed & Public co. perspective)
Take note at
the Board
Exceeding the
specified limits /
Shareholders
Boards
Audit
Committee
approval
approval
Infrequent, or
1. Competitive Bidding
2. Determination of fairness of pricing formulae having regard to the conditions of the
contract
3. Expert valuations
4. Transfer pricing regulations
Guidance available in transfer pricing provisions Indian and International guidance
The concept of arms length price between Associate Enterprises (AEs) is present under the IT
Act and the IT Rules. In fact, Section 92C of the IT Act prescribes six methods for determining
whether the transaction between two or more AEs is at arms length price, which are listed
down as follows:
(a)
(b)
(c)
(d)
(e)
(f)
Further, a reference can be made to the OECD Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations, 2010 (OECD Guidelines), which has laid down the
principles and guidelines for determining arms length price.
In addition to the above, in 2012, the United Nations also released chapters of UN TP Manual, the
framework of which is broadly similar to the OECD TP Guidelines which are probably the most
detailed guidance available on the subject of transfer pricing.
Also, the Customs Valuation Rules, 1988 provide that in cases of imports the transaction value of
identical/similar goods, deductive value and computed value methods needs to be used. These
methods are broadly similar to the methods discussed above in the Indian Transfer Pricing
provisions though there is a fair degree of difference in the manner in which the same are
applied in practice.
The agenda of the Board meeting at which the resolution is proposed to be moved shall
disclose(a) the name of the related party and nature of relationship;
(b) the nature, duration of the contract and particulars of the contract or arrangement;
(c) the material terms of the contract or arrangement including the value, if any;
(d) any advance paid or received for the contract or arrangement, if any;
(e) the manner of determining the pricing and other commercial terms, both included as part of
contract and not considered as part of the contract;
(f) 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
(g) any other information relevant or important for the Board to take a decision on the proposed
transaction.
Disclosure in the Explanatory Statement
The explanatory statement to be annexed to the notice of a general meeting convened pursuant
to section 101 shall contain the following particulars namely:(a) name of the related party;
(b) name of the director or key managerial personnel who is related, if any;
(c) nature of relationship;
(d) nature, material terms, monetary value and particulars of the contract or arrangement; and
(e) any other information relevant or important for the members to take a decision on the
proposed resolution.
Disclosures in the Board Report
1. Every company shall maintain one or more registers in Form MBP 4, and shall enter
therein the particulars of(a) company or companies or bodies corporate, firms or other association of individuals, in
which any director has any concern or interest, as mentioned under sub-section (1) of
section 184:
Provided that the particulars of the company or companies or bodies corporate in which
a director himself together with any other director holds two percent or less of the paidup share capital would not be required to be entered in the register;
(b) contracts or arrangements with a body corporate or firm or other entity as mentioned
under sub-section (2) of section 184, in which any director is, directly or indirectly,
concerned or interested; and
(c) contracts or arrangements with a related party with respect to transactions to which
section 188 applies.
2. The register shall be kept at the registered office of the company and the register shall be
preserved permanently and shall be kept in the custody of the company secretary of the
company or any other person authorised by the Board for the purpose.
Penalties
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 twentyfive thousand rupees but which may extend to five lakh rupees.