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
- Sale/Purchase/Supply of any Goods/Materials
- Sale/Purchase/Leasing of any Property
- Availing/Rendering of services
- Appointment of any agent for carrying out activities listed above [from points (i) to (iii)]
- Appointment to any office or place of profit (Director, Manager etc.) [Company, Subsidiary & Associate] [Note: Holding Company is not included]
- Remuneration for underwriting the subscription of any Securities/Derivatives
RPTs under SEBI (LODR)
Transfer of any:
- 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.
- Transaction between 2 Govt. companies
- Transaction with a wholly owned subsidiary
- 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.
- 10% or more of the respective limits (individually/ taken as awhole during FY)
- Sale, purchase or supply of any goods or materials – Turnover
- Sale/Purchase of property – Networth
- Leasing of property – Turnover
- 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
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