COMPANY SECRETARY ARTICLESHIP

PROJECT REPORT

PROJECT TOPIC:
COMPLIANCE WITH DISCLOSURE RELATING TO RELATED
PARTY TRANSACTIONS

Prepared By:
Saif Ali Khan
(CS Management Trainee)
Student Registration No.: 240885627/01/2021

Company Secretary Under Whom Trained:

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 Certificate
This is to certify that the project report entitled “COMPLIANCE WITH
DISCLOSURE RELATING TO RELATED PARTY TRANSACTIONS” submitted to
The Institute of Company Secretaries of India (ICSI) is a bonafide
record of work done by Mr. Saif Ali Khan under my supervision from
7th September, 2022 to 7th June, 2024.

Address: 02nd Floor, Building no. 1,

Indra Colony, Railway Road, Haryana – 131001
Date: 25/04/2024

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 PREFACE

As per the Company Secretaryship Regulations, 1982, the CS

management trainee is required to prepare a project report in final
quarter of his training period. The said project report should be
prepared in consultation with the Company Secretary under whom
he has been trained.

Keeping in view the requirements, I have prepared this project

report in consultation with my trainer, CS Amit Shukla (Proprietor of
M/S Amit Shukla & Associates).

This project report is an attempt to explain “Compliance with

disclosure relating to related party transactions” in simple and easy
way.

This project report has been put in order after a thorough study of a
variety of books, act, and data from web pages, for submission to the
Institute of Company Secretaries of India as a part of the course
curriculum.

-Saif Ali Khan

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 ACKNOWLEDGEMENT

This project is a culmination of the constant endeavour to learn while

training and pursuing a professional course such as the Company
Secretary. At the outset I would like to express my sincere
acknowledgement to my parents who have always encouraged me to
pursue this course as well as all my friends. Further, I would also like
to thank my mentor CS Amit Shukla, who trained me with great
enthusiasm and sincerity.

Further, I would also like to express my gratitude to my professional

colleagues at work who have always helped me while I was pursuing
my apprenticeship training, and last but not least to the Almighty,
who has given me the strength, courage, perseverance and the
power to grasp knowledge which are all essential attributes to
pursue a professional course such as the Company Secretaryship
Course.

-Saif Ali Khan

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 INDEX

S.No. Particulars Page No.

1 Introduction 6
2 Background & History 7-8
3 Laws on transactions with related parties 9
4 How to Determine a RPT 10
5 Definition of Related Party and Relative
- As per Companies Act 2013 11-12
- As per Listing Regulation 12
6 Definition of Related Party Transactions 13
7 Company Status and Applicability 14
8 Approval of Audit Committee for RPT 15
9 Related Party Transactions 16-18
10 Restrictions on Interested Directors and 19
Related Party with regard to presence in
meeting and voting
11 Approval Procedure for RPT 20
12 Exemption from approval for RPT 21
13 Exceptions to RPT 22
14 Omnibus Approval 23
15 Policy on RPT 23
16 Holding-Subsidiary RPT Provision 24
17 Disclosure or Compliance Requirement under 25-27
Companies Act 2013
18 Disclosure or Compliance Requirement under 28
Listing Regulation
19 Registers & Records 29
20 Consequences & Penalty for Non-Compliances 30
21 FAQ 31-32
22 Bibliography 33

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 INTRODUCTION
A company, in the course of conduct of its business, enters into various
transactions with different parties, including its related parties. Companies also
carry on their activities through subsidiary companies and associate
companies. Accordingly, related party relationships are a normal feature of
business. Due to this relationship, related parties may enter into transactions
that unrelated parties may not.

For example, an entity that sells goods to its related party at cost might not
sell on those terms to another customer. Also, transactions between related
parties may not be made on the same terms as between unrelated parties.
While entering into a contract or arrangement with a related party, such
related party may get favoured treatment in terms of pricing or on some other
conditions (such as credit period) which may affect the financial position or
profit and loss of the company concerned. Hence, the law contains detailed
compliance and disclosure provisions with respect to transactions with related
parties.

Every transaction with a related party may not be a 'related party

transaction' although every 'related party transaction' is necessarily a
transaction with a related party.

Not all RPTs are detrimental to the interest of the company or its shareholders.
Some transactions can be legitimate and serve practical, commercial purposes.
If companies are prohibited from entering into such transactions, their ability
to maximise shareholder value can suffer.

Therefore, the law in India does not prohibit RPTs. Instead, the law puts into
place a system of checks and balances, such as requirements for approval from
the board of directors/shareholders, timely disclosures and prior statutory
approvals, to ensure that the transactions are conducted within appropriate
boundaries.

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z
History and Background of RPT

Related party transactions (RPTs) in India have a significant history intertwined

with the evolution of corporate governance and regulatory frameworks. Here's
a brief background and history:

Pre-Regulation Era:

Before the advent of formal regulations, related party transactions were often
conducted without stringent oversight, leading to potential conflicts of interest
and abuse. The lack of transparency and disclosure requirements left
stakeholders vulnerable to risks associated with undisclosed related party
transactions.

Introduction of Corporate Governance Reforms:

In the late 1990s and early 2000s, India witnessed a series of corporate
governance reforms aimed at enhancing transparency, accountability, and
investor protection.
The recommendations of various committees such as the Kumar Mangalam
Birla Committee and the Narayana Murthy Committee underscored the
importance of regulating related party transactions.

Regulatory Framework:

 The Companies Act, 1956, laid down basic provisions related to related
party transactions, restrictions were imposed on certain kinds of
transactions with certain related parties by way of Sections 294, 294A,
294AA, 297 and 314 of the 1956 Act but they were relatively broad and
lacked specificity.
 Clause 49 of listing agreement - Under the erstwhile listing agreement,
several disclosure requirements with respect to RPTs were mandated
and the audit committee of a listed entity was required to review the
disclosure of related party transactions in the annual financial
statements with the management of the entity before submission to the
board of directors for their approval.
 The Companies Act, 2013, introduced comprehensive provisions
governing related party transactions, aligning with international best
practices and addressing the shortcomings of the previous legislation.
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  The Securities and Exchange Board of India (SEBI) also plays a crucial role
in regulating related party transactions, particularly for listed companies,
through the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015.

Key Provisions:

Under the Companies Act, 2013, related party transactions are subject to
approval by the board of directors and, in certain cases, shareholders'
approval.
Companies are required to disclose details of related party transactions in their
financial statements, including the nature, terms, and value of transactions.
The Act mandates the appointment of an Audit Committee to oversee related
party transactions and ensure compliance with regulatory requirements.

Challenges and Developments:

Despite the regulatory framework, challenges persist in effectively regulating

related party transactions, including issues related to identification, valuation,
and disclosure.
Regulatory bodies continue to refine and strengthen the framework for related
party transactions to address emerging concerns and enhance transparency.

Recent developments, such as amendments to the Companies Act and SEBI

regulations, aim to streamline and improve the oversight of related party
transactions, keeping pace with evolving corporate governance standards.

Impact on Corporate Governance:

- Enhanced regulation of related party transactions has contributed to

improved corporate governance practices in India, fostering greater
transparency, accountability, and investor confidence.

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 Laws on transactions with related parties

In order to appreciate the nuances of related party transactions, it is necessary

to understand the scope of the provisions of law, meaning of certain terms like
goods, property, ordinary course of business, arm's length basis, etc. The law
on transactions with related parties can be summarised in the following chart.

Laws on transactions with related parties

Companies Act, 2013

and Rules made SEBI(LODR) Regulations,
thereunder Accounting Standards
2015
(Section 177 & 188)

Regulation 23 read with

Section 177 & 188 Accounting Standard 18
Schedule V

Rule 6A & 15 of
Companies (Meeting of Indian Accounting
Board and its Power) Standard 24
Rules, 2014

The requirements concerning related party transactions under Companies Act,

2013 and SEBI (LODR) Regulations, 2015 may be divided into four key parts,
viz...,

 Identification of Related Parties

 Identification of Related Party Transactions

 Approval Process

 Disclosure requirements

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 How to Determine A RPT

To determine that whether a transaction is a Related Party Transaction or not

following three checks are to be made:

 Whether the party with whom the transaction being entered is a Related
Party? – Refer Section 2(76) and Regulation 2(1)(zb) of LODR (if applicable)
 Whether the transaction being entered is a Related Party Transaction? –
Refer Section 188(1) and Regulation 23 of LODR (if applicable)
 Whether such transaction being entered is in the Ordinary Course of
Business and on an Arm’s Length Basis or not? – For Listed company this
exemption is not available

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 Related Party and Relative
1. Related Party and Relative as per Companies Act, 2013
A. Related Party As Per Section 2(76) Of Companies Act, 2013:
Related Party with reference to company, means-
i) a director or his relative;
ii) a key managerial personnel or his relative;
iii) a firm, in which a director, manager or his relative is a partner;
iv) a private company in which a director or manager [or his relative] is a
member or director;
v) a public company in which a director or manager is a director [and holds]
along with his relatives, more than two percent of its paid-up share capital;
vi) 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;
vii) any person on whose advice, directions or instructions a director or manager
is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice,
directions or instructions given in a professional capacity;

viii) any body corporate which is—

A) a holding, subsidiary or an associate company of such company;
B) a subsidiary of a holding company to which it is also a subsidiary; or
C) an investing company or the venturer of the company.

Explanation.—For the purpose of this clause, “the investing company or

the venturer of a company” means a body corporate whose investment in
the company would result in the company becoming an associate
company of the body corporate;

(According to Notification no. GSR 464(E), dated 05th June, 2015 in case
of Private Companies Section 2(76) Sub- clause viii shall not apply with
respect to section 188.)

ix) such other person as may be prescribed;

According to Rule 3 of the Companies (Specification of Definitions Details) Rules, 2014 for
the purposes of sub clause (ix) of clause (76) of section 2 of the Act, a director other than
independent director or key managerial personnel of the holding company or his relative
with reference to a company, shall be deemed to be a related party.

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 B. Relative As Per Section 2(77) Of Companies Act, 2013:
Relative with reference to any person, means anyone who is related to another if-
a) they are members of Hindu Undivided Family;
b) they are husband and wife; or
c) One person is related to other in accordance with Rule 4 of the Companies
(Specification of Definitions Details) Rules, 2014.
A person shall be deemed to be the relative of another, if he or she is related to
another in the following manner, namely-
i) Father: the term “Father” includes step-father;
ii) Mother: the term “Mother” includes the step-mother;
iii) Son: the term “Son” includes the step-son;
iv) Son’s wife;
v) Daughter;
vi) Daughter’s husband;
vii) Brother: the term “Brother” includes the step-brother;
viii) Sister: the term “Sister” includes the step-sister.

2. Related Party and Relative as per SEBI(LODR) Regulations, 2015

A. Related Party As Per Regulation 2(1)(zb) Of SEBI(LODR) Regulations,

2015:
Related Party means a related party as defined under section 2(76) of
Companies Act, 2013 or under applicable accounting standards.

Provided that any person or entity belonging to the promoter or

promoter group of listed entity and holding 20% or more shareholding in
listed entity shall be deemed to be a related party.

Provided further that this definition shall not be applicable for the units
issued by mutual funds which are listed on a recognised stock
exchange’s.

B. Relative As Per Regulation 2(1)(zb) Of SEBI(LODR) Regulations,

2015:

Relative means relative as defined under section 2(77) of Companies Act,

2013 and rules prescribed thereunder.

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 Definition of Related Party Transactions
RPT as per Section 188 of Companies Act, 2013

Related Party with reference to a company means-

• sale, purchase or supply of any goods or materials;

• selling or otherwise disposing of, or buying, property of any kind;

• leasing of property of any kind;

• availing or rendering of any services;

• appointment of any agent for purchase or sale of goods, materials,

services or property;

• such related party’s appointment to any office or place of profit in the

company, its subsidiary company or associate company; and
• underwriting the subscription of any securities or derivatives thereof, of
the company
RPT as per Regulation RPT as per AS-18 RPT as per IND AS-24
2(1)(zc) Of SEBI(LODR)
Regulations, 2015
Transfer of Resources, Transfer of Resources, Transfer of Resources,
Services or Obligations Services or Obligations Services or Obligations
between a listed entity and between a reporting entity between a reporting entity
a related party, regardless and a related party, and another entity,
of whether price is charged. regardless of whether price regardless of whether price
is charged. is charged.

SEBI (LODR) Regulations defines related party transactions in a much general sense (relying
on the accounting standards) whereas the Act is much more specific in which transactions it
wants to regulate.

In the definition under regulations, specific attention is drawn to use the word ‘Resource’
which may include even items that do not meet criteria for recognition of assets.

To illustrate, a listed company is transferring to its fellow subsidiary ‘research work’ which
does not meet criteria for recognition as an intangible asset. Under regulations, the
proposed transaction will be covered as transfer of resource. Hence, regulations contain a
broader definition which is expected to cover all types of related party transactions.

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 Company Status and Applicability

STATUS OF THE COMPANY APPLICABILITY / COMPLIANCE OF

Private Company Section 188
Rule 15 of Companies (Meeting of
Board and Its Power) Rules, 2014
Listed Public Company Section 177 (Audit Committee & Its
(PSC< 10 Cr & N.W < 25 Cr) Approval)
Section 188
Rule 15
Regulation 23 of LODR – Not
Applicable
Regulation 34 of LODR – Applicable
Schedule V - Applicable
Other Listed Public Company Section 177 (Audit Committee)
(PSC>10 Cr or N.W > 25 Cr) Section 188
Rule 15
Regulation 23 of LODR – Applicable
Regulation 34 of LODR – Applicable
Schedule V - Applicable
Unlisted Public Company Section 177 (Audit Committee)
(PSC => 10 Cr or Section 188
T.O => 100 Cr or Rule 15
Aggregate
Loan/Borrowing/Deposit/Debenture
=> 50 Cr )
Other Unlisted Public Company Section 188
(PSC < 10 Cr & T.O < 100 Cr & Rule 15
Borrowing < 50 Cr)

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 Approval of Audit Committee (Section 177)

Section 177(4)(iv):
(4) Every Audit Committee shall act in accordance with the terms of reference specified in
writing by the Board which shall, inter alia, include,—

(iv) Approval or any subsequent modification of transactions of the company with related
parties:

Provided that the Audit Committee may make omnibus approval for related party
transactions proposed to be entered into by the company subject to such conditions as may
be prescribed;

Provided further that in case of transaction, other than transactions referred to in section
188, and where Audit Committee does not approve the transaction, it shall make its
recommendations to the Board:

Provided also that in case any transaction involving any amount not exceeding one crore
rupees is entered into by a director or officer of the company without obtaining the
approval of the Audit Committee and it is not ratified by the Audit Committee within three
months from the date of the transaction, such transaction shall be voidable at the option of
the Audit Committee and if the transaction is with the related party to any director or is
authorised by any other director, the director concerned shall indemnify the company
against any loss incurred by it:

Provided also that the provisions of this clause shall not apply to a transaction, other than a
transaction referred to in section 188, between a holding company and its wholly owned
subsidiary company.

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 Related Party Transactions
(Section 188 Read with Rule 15 of Companies (Meetings of Board and Its Powers) Rules, 2014

Except with the consent of the Board of Directors given by a resolution at a meeting (not by circular
resolution) of the Board and subject to such conditions as may be prescribed, no company shall enter
into any contract or arrangement with a related party with respect to Related Party Transactions

Prior Approval of Member’s by Ordinary Resolution is required if:

a) Paid Up Share Capital of company is 10 Cr or more or
b) Value of transaction during a Financial year exceed the specified sum
Note 1: the requirement of passing the resolution shall not be applicable for transactions
entered into between a holding company and its wholly owned subsidiary whose accounts
are consolidated with such holding company and placed before the shareholders at the
general meeting for approval.
Note 2: In case of wholly owned subsidiary, if the resolution is passed by the holding
company, it shall be sufficient for the purpose of entering into the transaction between the
wholly owned subsidiary and the holding company.
Threshold of Transaction Value for Member’s Approval
Transaction Value
i) Sale, purchase or supply of any Transaction value ≥ 10% of annual turnover
goods or materials, directly or
through appointment of agent
ii) Selling or otherwise disposing of, Transaction value ≥ 10% of net worth
or buying, property of any kind,
directly or through appointment
of agent
iii) Leasing of property of any kind Transaction value ≥ 10% of annual turnover
iv) Availing or rendering of any Transaction value ≥ 10% of annual turnover
services, directly or through
appointment of agent
v) Appointment to any office or Monthly remuneration > Rs. 2.50 lakh
place of profit in the company, its
subsidiary company or associate
company
vi) Remuneration for underwriting Transaction value > 1% of net worth
the subscription of any securities
or derivatives thereof
 Related Party shall not be entitle to vote on Member’s resolutions (In case of Private and
Government Company this restriction not apply if they have not committed default under
section 137 or section 92)
 If 90% members are either related party or relatives of promoters, RP can vote on
resolution.
 This section (188) does not apply to a transaction entered in Ordinary Course of Business
and are on Arm’s Length Basis.i.e., No Board resolution or Ordinary resolution is required if
transaction is in ordinary course and are on arm’s length basis.
However Approval of AC is required Page | 16
 Ordinary course of business

 Black’s Law Dictionary defines ‘ordinary course of business’ as the ‘normal routine in
managing the trade or business’.
 In common parlance, ‘ordinary course of business’ would include transactions which
are entered into in the normal course of the business pursuant to or for promoting
or in furtherance of the company’s business objectives, as per the charter
documents of the company.
For example, in case of a manufacturing company, purchase and sale of goods, taking
premises on lease/ rent, construction of factory, employing workers, etc. will be considered
as ordinary course of business. To carry on a business, several activities are carried on by the
company; all such activities will be considered to be in the ordinary course of business.
However, if a manufacturing company for the purpose of diversification, decides to acquire
another company which is engaged in a completely unrelated business, this activity will not
be considered to be in the ordinary course of business.
 In the case of M/s. Bharti Televentures Ltd. vs. Addl./Jt. Commissioner of Income
Tax, it was held that the Memorandum and Articles of Association is not conclusive
for deciding whether an activity is in the ordinary course of business of the company.
Frequency of the activity is sought to be highlighted. It should be a continuous
activity carried out in a normal organized manner.

Issue: Who determines that the transaction with related party is in the ordinary course of
business? Is it the Board or the Audit Committee?

View: The Companies Act, 2013 does not clearly lay down tests for determining whether a
transaction is in the ordinary course of business.
 The Audit Committee may decide whether a particular transaction is in the ordinary course
of business and such decision will be based on the policy on transactions with related
parties, if any.
 In case the company does not have an Audit Committee, the decision as to whether a
transaction is in the ordinary course of business or not will be taken by the Board.
 The company’s policy on transactions with related parties should specify the parameters to
guide the Audit Committee on whether a transaction is in the ordinary course of business or
not.
 Apart from such a policy, a company may formulate guidelines approved by the Audit
Committee and the Board of Directors on transactions with related parties. In such cases,
the company can enter into transactions based on the approved guidelines and every
transaction need not be placed before the Audit Committee for determining whether the
same is in the ordinary course of business or not.

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 Arm Length Transaction

 Explanation to sub-section (1) of Section 188 of the Act defines the term ‘arm length
transaction’ means a transaction between two related parties that is conducted as if
they were unrelated, so that there is no conflict of interest.
 The phrase ‘on an arm’s length basis’ is in fact ‘at arm’s length’ or ‘an arm’s length
relationship’ which means avoiding intimacy or close contact. The phrase ‘at arm’s
length’ in relation to dealings between two parties is used to refer to dealings when
neither party is controlled by the other.
 In the case of IIjin Automotive Private Limited vs. Asst. Commissioner of Income
Tax, the Court opined that “the determination of ‘arm’s length price’ seeks answer
to the question – What would have been the price if the transactions were between
two unrelated parties, similarly placed as the related parties in so far as nature of
product, and terms and conditions of the transactions are concerned?”

Office or Place of Profit

As per Explanation to Sub-Section (i) of Section 188 the expression “office or

place of profit” means any office or place where such office or place is held by:

i) a director, if the director holding it receives from the company

anything by way of remuneration over and above the remuneration
to which he is entitled as director, by way of salary, fee, commission,
perquisites, any rent-free accommodation, or otherwise;
ii) an individual other than a director or by any firm, private company or
other body corporate, if the individual, firm, private company or body
corporate holding it receives from the company anything by way of
remuneration, salary, fee, commission, perquisites, any rent-free
accommodation, or otherwise.

For example, in case of a transaction with respect to remuneration of a

director, it will be considered to be on an arm’s length basis if the director gets
remuneration in accordance with the provisions of Section 197 read with
Schedule V of the Act.

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 Restrictions on Interested Directors and Related Party with
regard to presence in meeting and voting

Approving Authority Companies Act 2013 Listing Regulations

Audit Committee  No such restriction  Only those member
of audit committee
who are
independent
director shall
approve the RPT
Board of Directors  Interested Director  No such restriction
in any contract or
arrangement with a
related party, such
director shall not be
present at the
meeting during
discussions on the
subject matter of
the resolution
relating to such
contract or
arrangement.
Shareholder  Related Party shall  All entities falling
not be entitle to under the definition
vote on Member’s of related parties
resolutions (In case shall not vote to
of Private and approve,
Government irrespective
Company this whether entity is
restriction not apply party to transaction
if they have not or not
committed default
under section 137
or section 92)
 If 90% members are
either related party
or relatives of
promoters, RP can
vote on resolution.

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 Approval Procedure under Companies Act
Approving Authority Compliance Requirement
Audit Committee  All RPT require approval of Audit Committee (if company
is required to constitute Audit Committee).
 Audit Committee may grant Omnibus Approval as per
Rule 6A of Companies (Meeting of Board and Its Power)
Rules, 2014
Board of Directors  All RPT require approval of Board of Directors at a duly
convene meeting (not by circular resolution)
Shareholders  Approval from member through Ordinary Resolution is
required if:
a) Paid-up share capital of company is 10 Cr or more or
b) Value of transaction during a financial year exceed the
specified sum

Approval Procedure under SEBI (LODR)

Approving Authority Regulation Compliance Requirement
No.
Audit Committee 23(2)  All RPT require prior approval of Audit Committee
Note: Only Independent director in AC shall approve
RPT
23(3)  Audit Committee may grant Omnibus Approval
Board of Directors  No specific requirement of taking board approval
4(2)(f)(ii)(6)  Key Function of board to monitor and manage
potential conflict of interest including abuses in RPTs
Shareholders 23(4)  All Material RPT and subsequent material
modification require prior approval of shareholders
Explanation by special resolution
23(1) & (1A)  A transaction is considered as material if:
a) Transaction during a FY exceeds 10% of annual
consolidated turnover or 1000 Cr, whichever is
less or
b) Transaction for payment of brand usage or
royalty to RP exceeds 5% of annual consolidated
turnover
 All entities falling under the definition of related
23(7) parties shall not vote to approve, irrespective
whether entity is party to transaction or not
Exemptions 23(5)  Regulation 23(2)(3)(4) shall not be applicable in case
of:
a) Transaction between two Government
Companies
b) Transactions entered into between a holding
company and its wholly owned subsidiary
whose accounts are consolidated with such
holding company and placed before the
shareholders at the general meeting for
approval.
c) Transaction entered into between two wholly
owned subsidiary of listed holding company

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Exemption under applicable law from approval of RPTs

Approval Companies Act 2013 Listing Regulations

From
Audit  Transaction, other than a transaction  Transactions entered into between
Committee referred to in section 188, between a two government companies;
holding company and its wholly owned  Transactions entered into between
subsidiary company. a holding company and its wholly
owned subsidiary whose accounts
are consolidated with such holding
company and placed before the
shareholders at the general meeting
for approval.
 Transaction entered into between
two wholly owned subsidiary of
listed holding company whose
accounts are consolidated with such
holding company and placed before
the shareholders at the general
meeting for approval.
Board of  Transactions entered in Ordinary  NA
Directors Course of Business and at Arm’s Length
Basis (AC approval require)
Shareholders  Transactions entered in Ordinary  Transactions entered into between
Course of Business and at Arm’s Length two government companies;
Basis (AC approval require)  Transactions entered into between
 Transactions entered into between a a holding company and its wholly
holding company and its wholly owned owned subsidiary whose accounts
subsidiary whose accounts are are consolidated with such holding
consolidated with such holding company and placed before the
company and placed before the shareholders at the general meeting
shareholders at the general meeting for for approval.
approval.
 In case of a Government company, in  Transaction entered into between
respect of contracts or arrangements two wholly owned subsidiary of
entered into by it with any other listed holding company
Government company, or with Central
Government or any State Government
or any combination thereof;
 In case of a Government company,
other than a listed company, in respect
of contracts or arrangements other
than those referred in the above item,
in case such company obtains approval
of the Ministry or Department of the
Central Government which is
administratively in charge of the
company, or, as the case may be, the
State Government before entering into
such contract or arrangement.

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 Exception to RPTs

Apart from the exemptions granted under applicable law, companies exclude certain RPTs
that are perfunctory or do not include any conflict of interest from the scope of the policy so
as to ensure that the Audit Committee is able to focus on critical transactions and not
review trivial RPTs. Eg., Reimbursement of expenses, payment of dividend etc. However,
certain companies exclude RPTs that are likely to result in abuse of corporate governance

 If a listed entity subject to compliance of SEBI (ICDR) Regulations, 2018 issues

specified securities on a preferential basis.
 Corporate actions by the listed entity which are uniformly applicable/offered to all
the shareholders in proportion of their shareholding:
a) Payment of dividend;
b) Subdivision or consolidation of securities;
c) Issuance of securities by way of a rights issue or a bonus issue; and
d) Buy-back of securities.
 Acceptance of fixed deposits by banks/NBFC‘s at the terms uniformly
applicable/offered to all shareholders/public, subject to disclosure of the same along
with the disclosure of related party transactions every six months to the stock
exchange(s), in the format as specified by the Securities Exchange Board of India.
 Allotment of shares

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 Omnibus Approval
COMPANIES ACT 2013 SEBI (LODR) REGULAGTION 23(3)
Audit Committee may grant Omnibus Audit Committee may grant Omnibus
Approval for RPTs after satisfying regarding Approval for RPTs after satisfying regarding
need for such approval for transactions of need for such approval and such approval in
repetitive in nature and such approval in interest of listed entity
interest of company
AC may, after obtaining approval from BOD AC shall lay down criteria for granting OA in
specify the criteria for making Omnibus line with RPT policy and such approval shall
Approval be applicable in respect of those transaction
which are repetitive in nature
OA should indicate the following: OA shall specify:
- Name of RP - Name of RP
- Nature and duration of transaction - Nature of transaction
- Maximum amount of transaction - Period of transaction
- Indicative base price & formula for - Maximum amount of transaction
variation - Indicative base price & formula for
- Other information important for AC variation
to take decision on proposed - Other information AC may deem fit
transaction
Where need for RPT cannot be foreseen and Where need for RPT cannot be foreseen and
above details are not available, AC may above details are not available, AC may
make OA for such transaction subject to make OA for such transaction subject to
their value not exceeding 1 Crore per their value not exceeding 1 Crore per
transaction transaction
Validity of OA – One FY Validity of OA – One Year
Review of RPT by AC for which OA is given – Review of RPT by AC for which OA is given –
As deem fit Once in every quarter
OA shall not be made for selling or disposing
of undertaking of the company

RPT Policy under LODR

Policy Regulation Compliance Requirement
No.
Policy on Materiality of RPT & on 23(1) A listed entity is required to formulate a policy on
dealing with RPT materiality of RPT and on dealing with RPT including
clear threshold limits duly approved by board of
directors
Such policy shall be reviewed by board at least once in
every 3 year and updated accordingly.
Criteria for Omnibus Approval 23(3)(a) AC shall lay down criteria for granting OA in line with
policy on RPT
Disclosure of RPT on website 46(2)(g) Listed entity shall disseminate policy on dealing with
RPT under a separate section on its website

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 Holding-Subsidiary RPT Provision
Provision Requirement
Section 2(76)(viii) Section 2(76)(viii) shall not apply with respect to Section 188 to a
Private Limited company.
fourth proviso to AC approval not necessary for Non-Section 188 transactions between
Section 177 (4)(iv) a Holding Company and its WOS.
fifth proviso to Shareholders resolution not necessary for transactions entered into
Section 188(1) between a holding company and its wholly owned subsidiary whose
accounts are consolidated with such holding company and placed
before the shareholders at the general meeting for approval.
Explanation 2 to In case of wholly owned subsidiary, the resolution is passed by the
Rule 15 holding company shall be sufficient for the purpose of entering into
the transaction between the wholly owned subsidiary and the
holding company.
Regulation 23(5)(b) Audit Committee or Omnibus Approval or Shareholders’ approval not
needed in case of transactions entered into between a holding
company and its wholly owned subsidiary whose accounts are
consolidated with such holding company and placed before the
shareholders at the general meeting for approval.
Regulation 23(5)(c) Audit Committee or Omnibus Approval or Shareholders’ approval not
needed in case of transactions entered into between two wholly
owned subsidiary of listed holding company

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Disclosure / Reporting Requirement under Companies Act

PROVISION REQUIREMENT OR COMPLIANCES

Section 188(2): Disclosure in Board Report every related party contracts or
arrangements shall have to be disclosed in
the Board’s report and referred to
shareholders along with the justification for
entering into such type of transactions in the
prescribed form i.e., Form no. AOC-2
(Regardless of whether RPT is on Arm’s
length or not)
Section 129: Disclosure in Financial Disclosure of related party transactions in
Statement financial statements of a company to be
made as per applicable accounting standard
Section 134(3)(h): Disclosure in Board Report Board’s report to include particulars of
contracts or arrangements with related
parties referred to in sec 188(1) in AOC 2
Rule 15(2): Interested Director not be Where any director is interested in any
present at the meeting contract with related party, such director
shall not be present at meeting during
discussion
Section 184 - Disclosures of Interest by 1- Every director of a company is
Directors required to disclose his concern or
interest in any company or
companies or bodies corporate, firm
or other association of individuals,
including shareholding details to all
companies in which he is a director
as follows :
 At the first board meeting in which
he participates as a director
 At the first board meeting in every
financial year
 Whenever there is any change in the
disclosures already made, at the first
board meeting held after such
change
In Form MBP-1

2- Every director of a company who is in

any way, whether directly or
indirectly, concerned or interested in
a contract or arrangement or

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 proposed contract or arrangement
entered into or to be entered into:
 With a body corporate in
which a director (singly or
along with other directors)
holds more than 2%
shareholding or is a
promoter/manager/CEO of
that body corporate.
 with a firm or other entity in
which such director is a
partner, owner or member
shall disclose the nature of his concern or
interest at the Board meeting in which such
contract or arrangement is discussed & shall
not participate in such meeting. ( Exemption
Dt.05/06/2015- to private limited -
interested director may participate in the
board meeting, after disclosing)

3- If contract or arrangement is entered

without undertaking the compliance
of Section 184 (2) then the same is
voidable at the option of the
Company.
4- If director contravenes sub-section 1
or 2, he shall be liable to a penalty of
one lakh rupees.
Companies (Auditor’s Report) Order, 2016 In terms of the Companies (Auditor’s Report)
Order, 2016, the auditor’s report on financial
statement of company shall include a
statement on whether all transactions with
related parties are in compliance with
Sections 177 and 188 of the Act, where
applicable, and that the details have been
disclosed in financial statement etc., as
required by the applicable accounting
standard

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 Other Disclosure Requirement under Companies Act

Rule 15(1): Agenda of the Board meeting at Explanation 3 to Rule 15(3): explanatory
which the resolution is proposed to be statement to be annexed to the notice of a
moved shall disclose:- general meeting shall contain the following
particulars, namely:-
a) the name of the related party and a) name of the related party;
nature of relationship;
b) the nature, duration of the contract b) name of the director or key
and particulars of the contract or managerial personnel who is related,
arrangement; if any;

c) the material terms of the contract or c) nature of relationship;

arrangement including the value, if
any;
d) any advance paid or received for the d) nature, material terms, monetary
contract or arrangement, if any; value and particulars of the contract
or arrangements;

e) the manner of determining the e) Any other information relevant or

pricing and other commercial terms, important for the members to take a
both included as part of contract and decision on the proposed resolution.
not considered as part of the
contract;
f) whether all factors relevant to the
contract have been considered, if
not, the details of factors not
considered with the rationale for not
considering those factors; and
g) Any other information relevant or
important for the Board to take a
decision on the proposed
transaction.

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 Disclosure / Reporting Requirement under LODR

REGULATION REQUIREMENT OR COMPLIANCES

Regulation 48: The listed entity shall comply with all the applicable and notified
Compliance with AS Accounting Standards
Regulation 23(9): The listed entity shall submit within 15 days from the date of
Disclosure of RPT to publication of its standalone and consolidated financial results for
Stock Exchange and on the half year, disclosures of related party transactions on a
its website consolidated basis, in the format specified in the relevant
Accounting standards for annual results to the stock exchanges
and publish the same on its website.(Disclosure is required even if
there is no new RPT during the period)
Regulation 34(3) read Annual report shall contain RPT disclosures as specified in Para A
with Schedule V: of Schedule V of these regulations
Disclosure in Annual
Report
Regulation 46(2)(g): Listed Entity to disseminate on its Website Policy on dealing with
Disclosure of Policy of RPTs.
RPT on website
Schedule V para C Report on Corporate Governance shall disclose disclosures on
Disclosure 10 (a): materially significant related party transactions that may have
Disclosure of material potential conflict with the interests of listed entity at large
RPT in Corporate
Governance Report
Schedule V para C Report on Corporate Governance shall disclose web link where
Disclosure 10 (f): policy on dealing with related party transactions is disclosed.
Disclosure of web-link
of Policy of RPT in
Corporate Governance
Report

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 Registers and Records
In terms of Section 189 of the Act, disclosures and contracts under Sections 184 and 188 of
the Act are required to be entered in the Register(s) of contracts with related parties and
contracts and bodies etc. in which directors are interested, as required to be maintained by
the company in Form MBP-4

 This Register shall be maintained in Form MBP-4 and will contain the following
details:
a) Name of companies or body corporates or firms or other association of individuals,
in which directors of a company have any concern or interest, as is required to be
disclosed by them under Section 184(1) of the Act.
b) Contract or arrangement with body corporates or firms or other entity as provided
under Section 184(2) of the Act, in which any director is directly or indirectly,
concerned or interested; and
c) Contracts or arrangements with a related party with respect to transactions to which
Section 188 applies i.e. related party transactions which are not in the ordinary
course of business or not on arm’s length basis.
 Register shall be kept at Registered office
 Register shall be preserved permanently
 Register shall be in the custody of CS or Person authorised.
 Register shall be open for inspection during business hours and extract / copies shall
be furnished on payment of such fees as prescribed.
 After entering the particulars, such register shall be placed before the next meeting
of the Board for signature by all directors.
 Register shall also be produced at the commencement of every AGM and remain
accessible during continuance of AGM.
 The following contracts or arrangements are not required to be entered in the
Register:

(a) Contracts or arrangements for the sale, purchase or supply of any goods, materials or
services if the value of such goods and materials or the cost of such services does not
exceed Rs. 5 lakh in the aggregate in any year; or

(b) Contracts or arrangements by a banking company for the collection of bills in the
ordinary course of its business

 Non Compliance – Every director who fails to comply with provision of this
section and rules made thereunder shall be liable to a penalty of Twenty-Five
Thousand Rupees.

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 Consequences & Penalty for Non Compliance of RPT
Provisions

Consequences of entering into Related Party Contracts or Arrangements by the Director or

the Employee without the consent of the Board or Approval by Resolution:

 Section 188(3) of the Act, provides that where any contract or arrangement is
entered into by a director or any other employee, without obtaining the consent of
the Board or approval by a resolution in the general meeting under Section 188(1)
and if it is not ratified by the Board or, as the case may be, by the shareholders at a
meeting within three months from the date on which such contract or arrangement
was entered into, such contract or arrangement shall be voidable at the option of
the Board or, as the case may be, of the shareholders and if the contract or
arrangement is with a related party to any director, or is authorised by any other
director, the directors concerned shall indemnify the company against any loss
incurred by it.
 Section 188(4) of the Act, states that it shall be open to the company to proceed
against a director or any other employee who had entered into such contract or
arrangement in contravention of the provisions of this section for recovery of any
loss sustained by it as a result of such contract or arrangement
 A person shall not be entitled to be appointed as a Director by virtue of Section
164(1)(g) of the Companies Act, 2013 upon such director being convicted of an
offence dealing with related party transactions under Section 188 of the Act at any
time during the last preceding five years.

Penalty for violation of provision:

 Section 188(5) of the Act, prescribes penalty for any director or any other employee
of a company, who had entered into or authorised the contract or arrangement in
violation of the provisions of this section:

In case of listed company Liable to penalty of Rs. 25 Lakhs

In case of any other company Liable to penalty of Rs. 5 Lakhs

 Non Compliance of RPT disclosure on consolidated basis shall attract a penalty of Rs

5,000 per day. [SEBI Circular dated 22.01.2020]

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 FAQ

1. What will be the cut-off date for determining whether the person or entity is a
related party?

For the purpose of determining whether a person/ entity is a related party due to
shareholding, the shareholding of 20% / 10% (w.e.f. April 01, 2023) will have to be
seen at any time during the immediately preceding financial year. The listed entity
will have to do a retrospective examination from April 01, 2022 and will have to see
the shareholding of a person/ entity at any point of time during FY 2021-22. If such
holdings exceed the threshold limit of 20% or such person/ entity falls under
promoter or promoter group category, they will be identified as a related party.

For determining whether the person/ entity is a related party for FY 2022-23, the
shareholding in the immediately preceding FY i.e., FY 2020-21 will be checked and
for FY 2023-24, the shareholding in FY 2022-23 will be checked.

2. What if there is a change in shareholding as compared to the previous year?

The text of the definition of related party explicitly states that a person/ entity will
be considered a related party, if ‘at any time during the immediately preceding
financial year’ his shareholding exceeds 20%/ 10% (w.e.f. April 01, 2023). Therefore,
if the shareholding of a person/ entity exceeds the threshold limit in the immediately
preceding financial year and subsequently increases or decreases, such person/
entity will be treated as a related party irrespective of its shareholding in the current
financial year.
Various scenarios on change of shareholding are discussed below:

Scenario Shareholding in previous FY Shareholding in Whether a related

current FY party in the
current FY or not?
I Holding > threshold Continues to exceed Yes

II Holding > threshold NIL or below Yes

threshold
III Holding < threshold Holding > threshold No

IV Variation in shareholding in NIL Yes

previous FY
April 1 - Holding > threshold
June 30 - Holding < threshold
Dec 30 – NIL holding

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In scenario I, the shareholding of a person/ entity exceeded the threshold limit in previous
FY, thus, such person/ entity will be treated as a related party in current FY. Similarly, in
scenario II and IV, since the shareholding exceeded the threshold, such person/ entity will
be considered as a related party, even if the shareholding decreased subsequently.

In scenario III, the shareholding of the person/ entity was below the threshold limit in
previous FY, therefore, such person/ entity will not be treated as a related party even
though the shareholding exceeded the threshold in current FY. However, for the next FY, it
will be considered as a related party.

3. Whether a related party of the subsidiary will be a related party of the holding
company?
As per the definition of related party, a related party of the subsidiary need not
necessarily be a related party of the holding company. However, the transactions
undertaken with the said related party by the holding listed entity will be construed
as a related party transaction under the Listing Regulations.
4. Whether a related party of the holding company will be a related party of the
subsidiary?
As per the definition of related party, a related party of the holding company need
not necessarily be a related party of the subsidiary company. While the promoter
and promoter group of the holding company, directors (other than IDs) and KMP and
their relatives of holding company may be the related party even for a subsidiary, a
person holding 20% or more directly or on a beneficial basis may not be holding
similarly in the subsidiary. However, the transactions undertaken with the said
related party of the holding listed entity will be construed as a related party
transaction under the Listing Regulations.
5. Whether a related party of the fellow subsidiary will be a related party of the other
fellow subsidiary?
Except for the holding company, directors (other than IDs) and KMP and their
relatives of holding company and the promoter and promoter group, a related party
of the fellow subsidiary need not necessarily be a related party of another fellow
subsidiary company. However, the transactions undertaken with the said related
party of the fellow subsidiary will be construed as a related party transaction under
the Listing Regulations.
Hence, to summarise, each of the entities in the group will have its own set of
‘related parties’. However, certain cross-transactions (as mentioned below) entered
into by an entity would qualify for ‘related party transactions’ even if the
transactions are not with its own related party, but with the related parties of other
entities (discussed below).

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 Bibliography
 ICSI – Executive Programme – Company Law
 ICSI – Professional Programme – Corporate Funding & Listing in Stock Exchange
 ICSI – Professional Programme – GRMCE
 Companies Act, 2013 EBook - MCA website (www.mca.gov.in)
 SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
- https://www.sebi.gov.in/legal/regulations/dec-2023/securities-and-
exchange-board-of-india-listing-obligations-and-disclosure-
requirements-regulations-2015-last-amended-on-december-21-2023-
_80422.html
 Companies (Meeting of Board and its Power) Rules, 2014
https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/rules.html
 Accounting Standard 18
https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/accounting-
standards.html
 Indian Accounting Standard 24
https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/accounting-
standards.html
 Companies (Specification of Definitions Details) Rules, 2014
https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://
www.mca.gov.in/Ministry/pdf/CompaniesSpecification2ndAmndtRules_19022021.p
df&ved=2ahUKEwjhgN_Nm9OFAxXBRmwGHaR4DjwQFnoECB0QAQ&usg=AOvVaw0A
nskN6cZTxFHkOKzmGz3o
 Companies (Auditor’s Report) Order, 2016
https://www.mca.gov.in/Ministry/notification/Notifications_2003/noti_12062003_4
80(E).html
 Guidance note on RPT by ICSI
https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://
www.icsi.edu/media/webmodules/Guidance_Note_on_RPTs_4-4-
2019ARC.pdf&ved=2ahUKEwjAzO69nNOFAxV4TGwGHWajBEoQFnoECA8QBg&usg=A
OvVaw2dM_j1HrfQuk6UP5SLz6S0

https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://
www.icsi.edu/media/webmodules/publications/A20ChapterPages.pdf&ved=2ahUKE
wjAzO69nNOFAxV4TGwGHWajBEoQFnoECBMQAQ&usg=AOvVaw0EZMBv4DePbd0B
J9W5INL3
 Other Relevant Rules and Regulations

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