All about Related Party Transactions – Part 2 (Determination & Approval)

Determination of Related Party Transactions

• Related Party Transaction in the context of companies means transaction between the company and its related parties.
• Every transaction with related party is related party transaction, however, approval mechanism may be different and situational.
• Transactions with related parties need not always be disadvantageous to the parties concerned. The concern arises only when there is abuse of a related stakeholders.

Specified RPTs under Companies Act

1. Sale/Purchase/Supply of any Goods/Materials
2. Sale/Purchase/Leasing of any Property
3. Availing/Rendering of services
4. Appointment of any agent for carrying out activities listed above [from points (i) to (iii)]
5. Appointment to any office or place of profit (Director, Manager etc.) [Company, Subsidiary & Associate] [Note: Holding Company is not included]
6. Remuneration for underwriting the subscription of any Securities/Derivatives

RPTs under SEBI (LODR)

Transfer of any:

1. Resources
2. Services
3. Obligations

Approval Mechanism

Listed Companies

• Approval of Audit committee is mandatory for every RPT &
• Approval of Shareholders (Ordinary Resolution) is to be taken for Material RPTs.

Material RPT = Transactions (either individually or taken as a whole) accounting for [5% in case of Brand/Royalty, 10% in case of other than Brand/Royalty] of the annual consolidated turnover of the listed entity.

Exception:

• Transaction between 2 Govt. companies
• Transaction with a wholly owned subsidiary

Unlisted Companies

• If there is an Audit Committee, its approval should be taken (except Transaction with a wholly owned subsidiary)
• If there is no Audit Committee and the transactions were entered on Arm’s Length Basis/Ordinary course of business, then no approval is required.
• If there is no Audit Committee and the transactions were not entered on Arm’s Length Basis/Ordinary course of business, Shareholder’s approval is required if the transactions are Specified RPTs and the Specified threshold is crossed.
• If the Specified threshold doesn’t cross, Board’s approval is enough.

Specified threshold

• 10% or more of the respective limits (individually/ taken as awhole during FY)

1. Sale, purchase or supply of any goods or materials – Turnover
2. Sale/Purchase of property – Networth
3. Leasing of property – Turnover
4. Availing/Rendering of services – Turnover

• Remuneration for underwriting the subscription of any Securities/Derivatives exceeding 1% of Networth
• Remuneration (other than Director’s remuneration) exceeding Rs. 2.50 lakhs per month (incl. company, subsidiary & associate)

Arm’s Length Price

The price if the transactions were between two unrelated parties with similarly placed terms & conditions

Ordinary Course of Business

• MoA Objects clause
• Activity is routine/normal/common in the particular industry
• Activity is repetitive/frequent
• Income earned from such activity is treated as Business Income in the company’s books

All about Related Party Transactions – Part 1 (Definition Part)

Framework Companies Act – Sections 177 & 188 SEBI (LODR) – Regulation 23 Accounting – AS 18, Ind AS 24 What is a Related Party? (Answered as per Companies Act)… Click Here to full read