Interplay of Related Party

Transactions between Companies

Act, 2013 & SEBI (LODR)
Regulations
23.07.2022
 Roadmap

• Introduction
• Key Statutory Provisions
• Definition: Related Party, Relative and Related Party Transaction
• Approval Mechanism
• Disclosure Requirements
• Penal Provisions
• Examples
 Introduction

• 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.
• A related party transaction (―RPT‖) - Where there is a pre-existing
relationship between the parties who are related.
• Pre-existing relation under the Companies Act, 2013 (―Act‖) and SEBI
(LODR), 2015 (―LODR‖)
 Key Provisions to understand the Pre-existing
Relationship between the Parties

• ‗Related Party‘ under Section 2(76) of the Act and Regulation 2(1)(z)(b)
of LODR;
• ‗Relative‘ under Section 2(77) of the Act read with Rule 4 of the
Companies (Specification of Definitions Details) Rules, 2014 and
Regulation 2(1)(z)(d) of LODR; and
• ‗Related Party Transaction‘ under Section 188 of the Act and Regulation
2(1)(z)(c) of LODR and Regulation 23 of LODR.
 ‗Related Party‘ – Section 2(76) of the Act

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 2% 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 (other than any advice/ guidance given in professional
capacity);
vii.any person on whose advice, directions or instructions a director or manager is accustomed to act. (other than any
advice/ guidance given in professional capacity).
What is Accustomed to
Who is a Relative? Act?
 Related Party - Act Contd…

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.
ix. Deemed to be a related party. [Rule 3 of Companies (Specification of Definitions Details) Rules,
2014 - a director other than an 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]
 ‗Relative‘ – Section 2(77) of the Act
• Section 2(77) of the Companies Act read with the relevant rules made thereunder define ‗relative‘ as:
1. Members of HUF; or
2. Husband and Wife; or
3. One person is related to the other, being their:
• Father, including step-father;
• Mother, including step-mother;
• Son including step-son;
• Son‘s wife;
• Daughter;
• Daughter‘s husband;
• Brother including step-brother; and
• Sister including step-sister.
LODR borrows the definition of ‗Relative‘ from Section 2(77) of the Act and rules prescribed thereunder.
 Accustomed to Act

• ‗Shadow director‘.
• Established general conduct - Directors of a company habitual of carrying
out tasks on the instructions of a third person/ party without exercising
own discretion/ judgement.
• There must be cogent evidence.
• This excludes advice/ guidance given in professional capacity.
• Person includes individual and/ or body corporate.
 Related Party - LODR

Regulation 2(1)(z)(b):
• Related party as defined under Section 2(76) of the Act or under the applicable accounting standards – either AS
18 or Ind AS 24, whichever is applicable.
• If the condition is met under either the Act or applicable accounting standard, as the case may be, the party
should be considered as a related party under LODR.

• Deemed to be a related party under LODR?

1. Any person forming a part of the promoter or belonging to the promoter group of the listed entity.
2. Any person holding equity shareholding in the listed entity:
(a) Amounting to 20% or more; or (b) Effective from 01.04.2023, 10% or more either directly or on a
beneficial interest basis at any time, during the immediately preceding financial year.
 RPT - Section 188 of the Act
Any contract or arrangement with a related party with respect to:
a) Sale, purchase or supply of any goods or materials;
b) Selling or otherwise disposing of, or buying, property of any kind;
c) Leasing of property of any kind;
d) Availing or rendering of any services;
e) Appointment of any agent for purchase or sale of goods, materials, services or property;
f) Related party‘s appointment to any office or place of profit in the company, its subsidiary
company or associate company; and
g) Underwriting the subscription of any securities or derivatives thereof, of the company.
 RPT - Regulation 2(1)(z)(c) of LODR

• Regardless of whether a price is charged for a transaction, a RPT involves transfer of

resources, services or obligations between:
a. A listed entity or any of its subsidiaries on one hand and a related party of the
listed entity or any of its subsidiaries on the other hand; or
b. Effective from 01.04.2023, a listed entity or any of its subsidiaries with any other
person or entity on the other hand for the ultimate objective of providing benefit
to a related party of the listed entity or any of its subsidiaries.

This above-mentioned definition is not applicable for the units issued by mutual funds which are listed on a
recognised stock exchange(s).
 Exceptions to RPT - LODR

• 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:
i. Payment of dividend;
ii. Subdivision or consolidation of securities;
iii. Issuance of securities by way of a rights issue or a bonus issue; and
iv. 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.
 Approvals under the Act and LODR

Under the Act: Section 188 r/w Rule

Section 177(4)(iv) 15 of Companies
Applicable on Listed/ Audit Committee‘s Section 188 (Meeting of Board
Unlisted Public approval is required Prior Board Approval and its Powers), 2014
Companies and Private for all RPTs Prior Shareholders
Companies Approval

Under LODR:
Applicable only on
companies who have listed Regulation 23
Regulation 23
their specified securities Prior Audit Regulation 23
Prior Shareholders
on stock exchanges other Committee Approval Prior Board Approval Approval
than securities listed on required for all RPTs
SME Exchange.
[Regulation 15 2(b)]
 Approval of Audit Committee

• Approval of audit committee for all transactions with related parties is required, including
transactions that are entered into in ordinary course of business and are on arms length basis.
[Section 188(1) explanation (b)]
• Audit committee has the power to grant omnibus approval. [Rule 6A the Companies
(Meetings of Board and its Powers) Rules, 2014.]
• Audit committee has the power to ratify transactions. [Section 177(4)(iv) 3rd Proviso]
• Approval not required for RPT entered into between holding company and its wholly owned
subsidiary (―WOS‖).
• Effective from 01.01.2022 under LODR, only independent directors in audit committee to
approve RPTs.
 Approval of Audit Committee Contd..

• Transaction entered into by subsidiary of listed entity:-

i. Effective from 01.04.2022 prior approval is required - Where value of
transaction exceeds 10% Annual Consolidated Turnover of the company.
ii. Effective from 01.04.2023, prior approval is required- Where value of
transaction exceeds 10% Annual Standalone Turnover of the company.
• Effective from 01.04.2022, prior approval of the audit committee is required for all
subsequent material modification.
• What is material modification?
• The audit committee shall review the status of long-term (more than one year) or recurring
RPTs on an annual basis. [Point 5 SEBI circular dated 22.11.2021.]
 Omnibus Approval under LODR

• Audit committee to lay down the criteria for grant of omnibus approval.
• Transactions should be repetitive in nature.
• Details to be mentioned while giving omnibus approval.
• Quarterly review.
• Validity of omnibus approval shall not exceed one financial year.
• An RPT for which the audit committee has granted omnibus approval in the
financial year 2021-2022, is required to be placed before the shareholders if it
is material in terms of Regulation 23(1) of the LODR Regulations. [SEBI
Clarification dated 30.03.2022.]
 Prior Board Approval

The agenda for the board

Prior board of director’s Can a resolution for entering
meeting shall disclose details
approval for RPT is required into RPT be passed by
about the related party and
under both the Act and LODR. circulation?
proposed RPT.

Can a director who is interested Exemption to prior board Will Section 188 be applicable
in a RPT be present while the approval? [Prior approval is on corporate restructuring,
related party agenda is being not required for RPTs in amalgamations? [MCA
discussed in the board ordinary course of business clarification dated
meeting? and at arms length.] 17.07.2014]

No prior board approval is required for a transaction between a holding company and its WOS, if WOS accounts is
consolidated with holding company and are presented in front of the shareholders for their approval.
 Prior Shareholder Approval - Act

i. Transaction of sale, purchase or supply of any goods or material, directly or through appointment of agent - Amounting to
10% or more of the turnover of the company.
ii. Transaction of selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent -
Amounting to 10% or more of the net worth of the company.
iii. Transaction of leasing of property of any kind - Amounting to 10% or more of the turnover of the company.
iv. Availing or rendering of any services, directly or through appointment of agent - Amounting to 10% or more of the turnover
of the company.
v. Place of profit in the company or any of its subsidiary company or associate company – Exceeding INR 2,50,000.
vi. Underwriting renumeration – Exceeding 1% of the net worth.

Limits mentioned in (i-iv) above shall apply on a transaction or a proposed transaction either
individually or taken together with previous transactions during a financial year.
 Prior Shareholder Approval - Act Contd…

• Can an equity shareholder who is classified as a related party in the company

vote on agenda of a proposed RPT? [MCA circular dated 17.07.2014 - only
concerned related party cannot vote.]
• Every concerned related party may vote in a company where 90% or more
members in number are relatives of promoters or are related parties.
• An ordinary resolution passed by the equity shareholders of the holding
company is sufficient for WOS, subject to WOS accounts being consolidated
with holding company and placed before shareholders for their approval at the
general meeting.
 Turnover

• Turnover: Aggregate value made from sale, supply or distribution of goods or

services rendered by the company during a financial year. [Section 2(91) of the Act]
• Accordingly, while calculating turnover should we consider revenue generated from
other income?
• Turnover under the Act to be computed on the basis of previous years audited
financial statement of the company.
• Under LODR consolidated turnover should be considered while computing the
turnover.
 Prior Shareholder Approval - LODR

• It is required if the transaction is of material nature.

• Material nature:
a) If the transaction(s) to be entered into individually or taken together with all the previous transactions
during a financial year is/ are in excess of INR 1,000 crore or 10% of the annual consolidated
turnover, whichever is lower.
b) Transaction of brand usage or royalty exceed 5% of the annual consolidated turnover of the company.
• No related party shall vote to approve a transaction, irrespective of whether the related party is involved
in the proposed RPT or not.
• Can the said related party vote against the RPT resolution in the general meeting?
 Exceptions to RPT

• In private companies a related party can vote on a resolution approving the RPT.
• Transactions between 2 government companies. [MCA notification dated 02.03.2020, and Regulation 23(5)
of LODR.]
• Transactions between:
a) Holding company and WOS; or
b) Two WOS of the listed holding company.
• Subject to accounts being consolidated with such holding company and placed before the shareholders of the
holding company at the general meeting for their approval.
 Disclosure Requirement - Act

• Every RPT shall be mentioned in the relevant Board Report of the company.
• Is disclosure in Form AOC-2 mandatory? [Yes, regardless of whether the RPT is on arms length basis or not.]
• Explanatory Statement of proposed RPT under the Act shall include: [Rule 15 of the Companies (Meetings of Board and
its Powers) Rules, 2014.]
a) name of the related party;
b) name of the director or key managerial personnel who is related, if any;
c) nature of relationship;
d) nature, material terms, monetary value and particulars of the contract or arrangements; and
e) any other information relevant or important for the members to take a decision on the proposed resolution.
 Disclosure Requirement - LODR

• Information to be provided to audit committee for review of proposed RPT. [Point 4 of SEBI circular dated 22.11.2021]
• Additional information to be mentioned in explanatory statement under LODR:
a. A summary of the information provided by the management of the listed entity to the audit committee;
b. Justification for why the proposed transaction is in the interest of the listed entity;
c. Where the transaction relates to any loans, inter-corporate deposits, advances or investments made or given by the listed entity or its
subsidiary, the details specified under point 4(f) above; (The requirement of disclosing source of funds and cost of funds shall not be
applicable to listed banks/NBFCs.)
d. If any statement of valuation or other external report is relied upon by the listed entity in relation to the proposed transaction, then the
same is to be sent to the registered email address of the shareholders;
e. % of the counter-party‘s annual consolidated turnover that is represented by the value of the proposed RPT, on a voluntary basis;
f. Any other information that may be relevant.
 Disclosure Requirement – LODR Contd…

• The listed entity shall make RPT disclosure to the stock exchange every 6 months within 15 days from the
date of disclosure/ publication of listed entities standalone or consolidated financials results in the format
given in annexure of SEBI circular dated 22.11.2021.
• Listed entity shall disclose these disclosure on the company's website from time to time.
• Effective from April 2023 this disclosure is required to be made at the time of disclosure/ publication of its
standalone or consolidated financials results.
• High value debt listed entity shall submit such disclosures along with its standalone financial results for the
half year.
• The said disclosure is to be made every 6 months for both the first and the second half year (six-month end
basis). [Q3. Guidance note on disclosure of RPT dated 25.04.2022.]
• RPT disclosure is required to be made even if there are no new related party transaction during the reporting
period. [Q6.Guidance note on disclosure of RPT dated 25.04.2022]
 Penal Provisions

• Any director or employee that enters into a contract or arrangement in violation of Section 188:
i. Listed entity: Shall be liable to a penalty of INR 25,00,000, or
ii. Other Company: Shall be liable to a penalty of INR 5,00,000.
• Is such a contract or arrangement voidable at the option of the board of directors or shareholders as the
case may be? [Section 188(3) of the Act.]
• Can company ask for indemnification of financial loss from the directors or employees that enter into a
contract or arrangement with related party without prior approval of board of directors or shareholder,
as the case may be? [Section 188(4) of the Act.]
• Non-compliance of RPT disclosure on consolidated basis shall attract a penalty of INR 5,000 per day.
[SEBI Circular dated 22.1.2020.]
 Example

Example 1: A holding listed company and its unlisted subsidiary enter into a contract or arrangement of
renewable nature wherein the unlisted subsidiary is required to deposit performance guarantee to the holding
entity. The said performance guarantee is of rolling nature and can be forfeited by the holding entity if the
performance of unlisted subsidiary is unsatisfactory. Further, the holding company is required to pay the
unlisted subsidiary a service fees/ commission on the basis of the performance of the unlisted subsidiary
during that particular year.
• Q1. Will the approvals mechanism mentioned under the Act and/ or LODR be required for every subsequent
year the RPT contract is renewed?
• Q2. Will the prior board approval and/ or prior shareholders approval be required if the transaction is at arms
length basis and is in the ordinary course of business?
• Q3. Is it mandatory to obtain a arms length transaction certificate to show the nature of the RPT?
 Example Contd…

A1. Yes, prior board approval and/ or prior shareholders approval, as the case may be, shall be required for
every subsequent financial year the contract is renewed.
A2. The prior approval of the board and/ or the shareholders of the listed entity will not be required under the
Act if the contract or arrangement is on arms length basis and is entered into in the ordinary course of business.
Under LODR there is no such exemption for contract or arrangement entered into on arms length basis and in
ordinary course of business. Prior approval of the board or shareholders is to be taken wherever the prescribed
thresholds are breached.
A3. It is the responsibility of the company to assure themselves and in case of an enquiry by the relevant
authorities that the contract or arrangement was entered into on arms length basis and in ordinary course of
business. Accordingly, it is not mandatory to acquire an arms length transaction certificate from an independent
professional.
 Disclaimer

The information contained in this presentation has been compiled for informational,
educational and discussion purposes only and is neither intended to be nor may be relied
on in any manner as an opinion or advice. It may not be relied upon by any other person
for any purpose, nor is it to be quoted or referred to in any document or shown to, or
filed with any government authority, agency or other official body without our consent.
No representation or warranties are made under this presentation, and nothing herein
shall be construed to amount to an opinion or be binding on any of the persons referred
to herein.
Further, the applicable laws and regulations are dynamic and are subject to any changes,
clarifications and amendments that may be issued by relevant authorities, which may
impact this presentation.
ALPHA CORPORATE LEGAL
24th Floor, Etherea Coworking,
Alphathum, Tower B, Sector 90,
Gautam Buddha Nagar – 201305.

Email: [email protected]
Mob:+ 91 9818697266