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Related party transactions under Companies Act,  2013
Learning objectives
In this chapter you will learn in detail about:
  • What constitutes related party transactions and the rationale behind their regulation
  • Exceptions to related party transactions
  • How to undertake related related party transactions and associated compliance requirements
  • Changes introduced by new Companies Act 2013
  • Consequences of violation of related party transaction provisions

Background to related party transactions
It is common to enter into arrangements with individuals and entities within their personal or professional networks. Related party transactions are governed by multiple legal and accountancy frameworks – Companies Act, Income Tax Act (for tax purposes) and under Accounting Standards (for accounting purposes).

Related party transactions can potentially be used to distort the impact of tax laws by shifting income from one taxable party to another, an evil sought to be regulated by the concept of ‘transfer pricing’ under tax laws. Under the Companies Act, the primary intention behind regulating related party transactions is to prevent directors from deriving personal benefits at the cost of the shareholders.

The Companies Act has several provisions which regulate conflict of interest and and places certain checks on transactions between aa company and another party if the two are connected through a common person (or entity), or through persons which have certain familial ties. As the company primarily acts through the board of directors, the conflict of interest provisions regulate conduct of directors at board or committee meetings.

Example: A particular director (it could even be multiple directors) may have an interest (apart from his interest in capacity as director of the company) in matters discussed at board meetings. For example, when a company is evaluating proposals from various suppliers with whom it may enter into a contract a board meeting. It may so happen that one of the directors of the company holds shares of the supplier as well. Although the director may act impartially, he will be required to follow certain procedures under the Companies Act.

Types of related-party transactions which are regulated by Companies Act 2013
The list of restricted contracts has been expanded by the 2013 Act – earlier, it stipulated contracts for sale, purchase, supply of any goods, materials and services, for underwriting the subscription of any shares or debentures of the company. As per the 2013 Act, selling, leasing or otherwise transferring property, appointment of agents for sale, purchase or supply of goods and services and appointment of the person to an ‘office of profit’ (defined as any position where remuneration is received in any capacity other than director – receipt of salary, fee, commission and perquisites qualifies as remuneration for holding an office of profit) in the company or its group companies are covered within the ambit of related party transaction.


The Companies Act specifies which types of transactions between related parties are regulated – the list is wide enough to cover almost any kind of commercial arrangement:
  • sale, purchase, availing or rendering or supply of any goods, materials, property  or services
  • appointment of any agent for the purpose of sale of goods, materials, services or property
  • appointment of the related party to any office for profit (if the person is a director, any remuneration received above his remuneration and perks as a director or in case other case as remuneration or salary or perks) in the company or its subsidiary or associate company
  • arrangementsfor underwriting the subscription of any shares in, or debentures of the company.

Certain transactions will not be treated as related party transactions -
  • Transactions which are undertaken in ordinary course of business at “arm`s length” basis, that is, a transaction which where the related parties act independently like unrelated third parties;
  • Transactions which arise out of restructuring, mergers or acquisition transactions entered into betweena holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company
  • and which have been approved by the shareholders in the general meeting.
  • In case of private companies, transactions between the holding company, subsidiaries, associates and fellow subsidiaries of a company will not be considered as related party transactions.
Note: Even where a transaction does not attract related party transaction provisions on grounds of being an arms-lenth transaction, for companies which are required to constitute audit committee, it may be subject to the committee’s approval.

Audit committee is required to be constituted by all listed companies and unlisted public companies which satisfy any of the following conditions:
o paid up capital of INR 10 crores or more.
Note on calculation of paid-up capital: Paid-up capital does not include premium paid on the shares. Therefore, if a company has issued 100,000 shares of INR 10 each at a premium of INR 990 per share, its paid-up capital will be INR 10,00,000, and it will not need Central Government approval for entering into restricted contracts.
o turnover of INR 100 crores or more
o outstanding loans, borrowings, debentures or deposits of INR 50 crores or more

How to undertake related party transactions
Related party transactions are not prohibited – they are merely regulatedunder the law to ensure that interest of the shareholders is not compromised due to the possibility of the underlying personal interest of a director.Under the 1956 Act, companies with more than INR 1 crore paid up capital required Central Government approval to enter into related party transactions, but the 2013 Act does not have this requirement.

Depending on the transaction, the following checks are to be followed:
Related party transactions require approval through a board resolution – individual directors cannot enter into the transaction. This board resolution also cannot be passed through circulation.

Practical implication:
The board of directors have power to designate an individual director or third party to perform certain functions and bind the company (through a board resolution and power of attorney). Note that this process will not be workable for related party transactions in respect of the director to whom a specific function has been delegated.  The process of circulation is a method to get rid of the requirement of a physical meeting and share the proposed resolution individually with directors. This is not permitted for all kinds of corporate decision.

The 2013 Act prohibits this process for for related party transaction approvals, as it is viewed as a way to circumvent the formal meeting process. The only exception is In case of urgent necessity (whenever this ground is invoked it may have to be justified by the board), a contract described above can be entered into without prior board approval, but only if the board consent to it at a board meeting within three months of the date of the contract. Without board consent for the contract, anything done pursuant to the contract shall be voidable at the option of the Board.
  • The director who is interested in a contract with a related party cannot vote or be present in the board meeting called for approving such a transaction. . However, this provision is not applicable on private companies (vide Exemption notification for private companies dated 5th July 2015).
[See Section 184 of the Companies Act, 2013 or Section 300 of the Companies Act, 1956and Rule 15 of Companies (Meetings of the Board & its Powers) Rules, 2014]
  • Transactions exceeding certain thresholds require prior approval of the shareholders by a resolution the threshold is applicable not only to a single transaction but all transactions of a similar nature taken together during a financial year. No member of the company will be allowed to vote on a resolution for approving any contract or arrangement entered by the company if such a member is a related party to that particular agreement or arrangement. The thresholds are as follows:
Type of transaction
Sale or purchase of goods Exceeding 25 percent of turnover
Sale, purchase or leasing of property Exceeding 10 percent of net-worth
Service contracts Exceeding 10 percent of net-worth
Appointment to office of profit in the company or its sister concerns If the remuneration exceeds INR 2.5 lakhs per month
Remuneration for underwriting security or derivative issuance Exceeding 1 percent of the net-worth. 
  • In companies which have an Audit Committee, related party transactions can be approved or modified by the Audit Committee as well. Audit committee is allowed to make omnibus approval for related party transactions, subjected to such conditions as laid down in the rules.
Compliance aspects of related party transactions
  • Every related party transaction must be referred to in the Board`s report to the shareholders along with the justification for entering into such contract or arrangement.
  • All companies must keep a separate register containing details of all related party transactions entered into by it of a value exceeding INR 5 lakhs, and must be placed before next meeting of the Board and must be signed by all the directors of the company. Such register must be kept at the registered office of the company and during the annual general meeting of the company for inspection by its members.
  • Disclosure of interest:Directors must individually disclose their interest (ownership / shareholding) in other entities to the Board of Directors incorporate bodies of which the director is a promoter, manager, CEO, shareholder or other entities (e.g. non-profits, proprietorships, private trusts, LLPs, partnerships) of which the director is an owner, member or partner.
Only exception is where directors of one company taken together have less than 2 % of paid up capital of another company.

Under the Companies Act 1956, a director could give notice annually (for example, listing out the companies in which he owns shares or is a director) or on a case to case basis (i.e. at a board meeting at which a matter in which he is interested is discussed). If the notice was generally given, it was valid for a year (and could be renewed). This notice was customarily given in Form 24AA earlier, but is now to be given in Form MBP 1. This form should be preserved for 8 years after the year of disclosure.

The form is not required to be filed with the Registrar of Companies. The general notice for renewal should also be given in the Board Meeting.
As per the Companies Act 2013, this disclosure must be mandatorily made on an annual basis, beginning from the first meeting of the Board from when the director assumes office. Any periodical changes must be made at the next board meeting. The format of the disclosure may be prescribed by the government.
(See Section 184 of the Companies Act, 2013 / Section 299 of the Companies Act, 1956)
Impact on prior related party transactions (entered before the commencement of the Companies Act, 2013)

There is no requirement to take fresh approval of any related party transactions that were entered into before the commencement of section 188 of the Companies Act, 2013. However, provisions of these act will become applicable if any modification is made to those contracts.
Summary of key changes which have been done in Companies Act, 2013 with respect to related party transactions:
  • Central government approval of related party transactions has been done away with.
  • ‘Arm’s length transaction’ has been substituted with cash at prevailing market price.
  • Related party transactions must be described in the board’s report along with justification for entering into such contracts and arrangements.
A special provision has been enacted which outlines the consequences of contravention of the requirements of the Companies Act. Earlier, it was merely punishable as per the general provisions under the 1956 Act which did not impose harsh penalties. It is now covered specifically in the section itself – violation attracts financial liability on the director to reimburse the company and criminal liability (including imprisonment in case of a listed company.
Violation of procedural requirements pertaining to related party transactions

What happens if a director of a company enters into a contract (on behalf of the company) without observing provisions pertaining to related party transactions? Is the contract binding?

Practical guidance
  • Where necessary internal approvals have not been obtained, there is a three-month window available to ratify the transaction (from the board or shareholders, as applicable). As per the doctrine of indoor management, when a third party enters into a contract with a company, he or she is entitled to assume that internal requirements (such as obtaining necessary board resolutions) have been complied with. If a related party transaction provision has not been complied with, this doctrine is not applicable as the contractis voidable at the option of the board. If the board does not ratify the contract, the third party will suffer a loss – hence, it is important for any third party to ensure that it requires the company to obtain and furnish a copy of necessary board / shareholder approvals as a condition precedent to the transaction.
  • At the same time, the company may suffer a loss if it upholds or cancels the transaction - in that case, the director must indemnify the board for any loss that has been suffered, irrespective of whether it has proceeded further with the transaction or cancelled it.
  • Criminal consequences are also prescribed for breach of related party transactions procedures, which is a new feature in the 2013 Act -there was no separate penalty provision in the Companies Act, 1956.Under the new act, all directors or company employees who had entered into or authorized the contract or arrangement in violation of the Companies Act provisions pertaining to related party transactions can be fined an amount between INR 25,000 to INR 5 lakhs and for listed companies the punishment can include up to 1 year’s imprisonment as well.
Guidance Note: How to identify a related party-transaction
Use this checklist to identify whether a person you are entering into a transaction with is a related party. The following persons qualify as related parties.
  • a director, key managerial personnel (KMP), relative of a director or KMP. See discussion below to understand who is covered within the ambit of relative or KMP.
  • Firm or company in which a director / manager or his relative is a partner or director
  • Public company where the director / manager (along with relatives) holds more than 2 percent of the capital
  • Group companies (i.e. holding, subsidiary and associate companies)
  • Any person in accordance with whose advice the company acts (excluding advisors in professional capacity)

 Who qualifies as a Key Managerial Personnel (KMP) ?
The CEO, Managing Director, Manager, company secretary, a whole-time director, the CFO and any other person who may be prescribed by the Central Government will qualify as the KMP.


The word relative is defined under the Companies Act 2013 to include members of a Hindu Undivided Family (HUF), husband and wife and such other persons as may be prescribed by the government.
The 1956 Act included the following persons within the ambit of relatives:
1.      Father
2.      Mother (including step-mother)
3.      Son (including step-son)
4.      Son's wife
5.      Daughter (including step-daughter)
6.      Father's father
7.      Father's mother
8.      Mother's mother
9.      Mother's father
10.  Son's son
11.  Son's Son's wife
12.  Son's daughter
13.  Son's daughter's husband
14.  Daughter's husband
15.  Daughter's son
16.  Daughter's son's wife
17.  Daughter's daughter
18.  Daughter's daughter's husband
19.  Brother (including step-brother)
20.  Brother's wife
21.  Sister (including step-sister)
22.  Sister's husband

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