The Companies Act, 2013, governs the corporate landscape in India, providing a comprehensive framework for the regulation and management of companies. One crucial aspect of corporate governance addressed by the Act is Related Party Transactions (RPTs). Related Party Transactions are transactions between a company and its related parties, which include directors, key managerial personnel, their relatives, and entities in which they have a significant influence.
Definition of Related Party Transactions:
As per Section 2(76) of the Companies Act, 2013, a Related Party Transaction is defined as a transaction entered into by a company with a related party. Related parties are classified into three categories:
- Related Parties under Section 2(76)(i):
- Director or his relative
- Key managerial personnel or his relative
- Firm, in which a director, manager, or his relative is a partner
- Private company in which a director or manager is a member or director
- Public company in which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up share capital
- Related Parties under Section 2(76)(ii):
- Public companies where directors, along with their relatives, hold more than 10% of the paid-up share capital
- Related Parties under Section 2(76)(iii):
- Any body corporate whose board of directors, managing director, or manager is accustomed to act in accordance with the advice, directions, or instructions of a director or manager
Section 188 of the Companies Act, 2013, lays down the provisions governing Related Party Transactions. Key elements of the regulatory framework include:
- Approval by the Board:
- All RPTs require prior approval by the Board of Directors. Interested directors must abstain from voting.
- Shareholder Approval:
- Certain RPTs may require approval from the shareholders through a special resolution.
- Disclosure Requirements:
- Full disclosure of RPTs in the Board’s report, including details of the transaction, the nature of the relationship, and the material terms.
- Pricing and Commercial Terms:
- Transactions must be conducted at arm’s length and on commercial terms. Any deviation requires justification.
- Audit Committee Scrutiny:
- The Audit Committee plays a crucial role in scrutinizing and approving RPTs.
Penalties for Non-Compliance:
Non-compliance with the provisions related to RPTs can result in severe consequences. Section 188(3) outlines penalties, including fines and imprisonment for officers in default.
Challenges and Best Practices:
- Conflict of Interest:
- Mitigating conflicts of interest is crucial. Companies should establish robust procedures for identification, disclosure, and resolution of potential conflicts.
- Transparent Reporting:
- Transparent reporting in financial statements enhances accountability and builds investor confidence.
- Corporate Governance:
- Strong corporate governance practices, including an independent board and effective audit committees, are essential.
Related Party Transactions, though essential for business growth, pose challenges to corporate governance. The Companies Act, 2013, provides a comprehensive framework to ensure transparency, accountability, and fairness in such transactions. Companies must adhere to these regulations, fostering a culture of integrity and ethical conduct in their operations.