Understanding Related Party and Related Party Transactions
Related Party
Under Indian law, particularly Section 2(76) of the Companies Act, 2013, a related party
includes entities or individuals connected to the company in a manner that may allow them to
influence transactions or decisions. This includes:
1. Directors or their relatives.
2. Key managerial personnel (KMP) or their relatives.
3. Holding, subsidiary, or associate companies.
4. Any person or entity with significant influence or control over the company.
Related Party Transactions (RPTs)
These are transactions between a company and its related parties that can include:
Sale, purchase, or supply of goods/materials.
Selling or leasing of property.
Provision of services.
Transfer of resources, obligations, or commitments.
Such transactions must comply with Section 188 of the Companies Act, 2013, which
governs approval, disclosure, and documentation requirements.
Determining if Two Group Entities with the Same Directors Are Related
Parties
Two group entities with the same set of directors would likely qualify as related parties,
provided:
1. Common Control or Influence: If the directors exercise control or significant
influence over both entities, these entities are considered related parties.
2. Definition of Related Party: According to the Companies Act, a company is related
to another if:
o One is a holding, subsidiary, or associate of the other.
o They share common directors who influence decisions.
For example:
Entity A and Entity B have the same directors, but no cross-ownership or control is
exercised by one over the other. In this case, they may not strictly qualify as related
parties unless the common directors exercise significant influence over both entities.
If Entity A owns a significant stake in Entity B, or there is an arrangement that
allows one to control the other, they would be considered related parties.
Compliance for Related Party Transactions
1. Board Approval: All RPTs require prior approval of the Board of Directors.
2. Audit Committee Approval: Listed companies must have RPTs approved by their
audit committee.
3. Shareholders’ Approval: Transactions exceeding prescribed limits (under Rule 15 of
Companies (Meetings of Board and its Powers) Rules, 2014) require shareholders'
approval via an ordinary resolution. Related parties cannot vote on such resolutions.
4. Disclosure: Details of RPTs must be disclosed in the Board’s Report, financial
statements, and to stock exchanges (for listed companies).
Penalties for non disclosure of insider trading
. Penalty for Insider Trading: Section 15G of the SEBI Act, 1992
Section 15G provides the penalty for insider trading. If a person indulges in insider trading,
they may be penalized as follows:
Minimum Penalty: ₹10 lakh.
Maximum Penalty: ₹25 crore or three times the amount of profit made or loss
avoided due to insider trading, whichever is higher.
2. Penalty for Failure to Disclose: Section 15A of the SEBI Act, 1992
Section 15A(b) specifically addresses penalties for failure to disclose required information
under the regulations.
Penalty: Up to ₹1 lakh for each day during which the failure continues or ₹1 crore,
whichever is lower.
3. Criminal Penalties: Section 24 of the SEBI Act, 1992
In cases of serious violations:
Imprisonment: Up to 10 years.
Fine: Up to ₹25 crore.
Both imprisonment and fine may be imposed in aggravated cases.
4. Debarment from the Securities Market: Regulation 11 of the PIT
Regulations, 2015
SEBI has the power to debar individuals or entities from accessing or dealing in the securities
market.
Such persons/entities may be restricted for a specific period or permanently,
depending on the gravity of the violation.
5. Disgorgement of Unlawful Gains: Regulation 10 of the PIT Regulations,
2015
SEBI can order the disgorgement of any unlawful gains made by the insider.
These gains are calculated as the difference between the price at which the transaction
occurred and the market price after the UPSI was made public.
AOA- governs companys internal operations and management
Specifies the roles, powers, and responsibilities of the Board of Directors,
shareholders, and other stakeholders.
Share Capital and Transfer Rules:
Regulates the issuance and transfer of shares, rights of shareholders, and procedures
for share buyback.
MOA
Corporate Governance
Qualifications for Independent Directors along with the duties and guidelines for
professional conduct (Section 149(8) and Schedule IV thereof).
Mandatory appointment of one woman director on the board of listed companies
{Section 149(1)}.
Mandatory establishment of certain committees like Corporate Social Responsibility
Committee {Section (135)}, Audit Committee {Section 177(1)}, Nomination and
Remuneration Committee {Section 178(1)}, and Stakeholders Relationship
Committee {Section 178(5)}.
Holding of a minimum of four meetings of Board of Directors every year in such a
manner that not more than 120 days shall intervene between two consecutive
meetings of the Board {Section 173(1)}.
CONTRACT
bailment" is the most broad concept, referring to the act of transferring possession of
goods to another party for a specific purpose, while "pledge" is a type of bailment where
goods are transferred as security for a debt, "lien" is a legal right to retain possession of
property until a debt is paid, and "hypothecation" is a form of security where the
borrower retains possession of the asset while using it as collateral for a loan, essentially
creating a charge on the property without transferring physical possession to the lender;
meaning that a pledge is a specific form of bailment used to secure a loan, where the
lender takes physical possession of the pledged goods, while hypothecation allows the
borrower to keep possession of the asset while still using it as collateral
