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

Related-Party-Transactions-292d71fd
  • 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 propertyNetworth
  3. Leasing of property – Turnover
  4. Availing/Rendering of servicesTurnover
  • 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

CA Prabhath Sharma Ganti

Working as Audit Senior Assistant @Deloitte USI. Enthusiastic and Innovative writer. Writes about Taxation and Stock market aspects.

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