Mastering Related Party Transactions: A Guide for Indian Companies

Related Party Transactions (RPTs) are one of the most scrutinized aspects of corporate governance in India. When handled appropriately, they enable efficient business operations. When mismanaged, they can raise red flags for regulators, investors, and shareholders.

To promote transparency and fairness, the Companies Act, 2013 outlines specific rules for how Indian companies must deal with RPTs — including approvals, disclosures, and filings. Whether you're a compliance officer, company secretary, or business owner, understanding these rules is crucial for staying compliant and maintaining stakeholder trust.

What is a Related Party?

Under Section 2(76) of the Companies Act, 2013, a "related party" in relation to a company includes:

• Directors and Key Managerial Personnel (KMP) or their relatives
• Firms in which directors or their relatives are partners
• Private companies in which directors or managers are members or directors
• Public companies in which a director or manager holds more than 2% of share capital along with relatives
• Holding, subsidiary, or associate companies
• Any entity that acts under the instructions of a director or manager
• Investment companies and entities controlled by the company or its KMPs

This broad definition ensures that all relationships which might influence business decisions are brought under scrutiny.

What Qualifies as a Related Party Transaction?

As per Section 188 of the Act, RPTs include:

• Sale or purchase of goods or materials
• Sale or purchase of property
• Leasing of property
• Availing or rendering of services
• Appointment of agents for the above activities
• Appointment to any office or place of profit in the company, subsidiary, or associate
• Underwriting of securities

These transactions must be conducted at arm’s length and in the ordinary course of business, or else they trigger special compliance requirements.

Approval Requirements Under the Act

1. Board Approval

Every RPT must first be approved by the Board of Directors through a resolution passed at a board meeting. Directors who are interested in the transaction must not participate in the discussion or vote.

2. Shareholder Approval

If the value of an RPT crosses the limits prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, the company must obtain prior approval from shareholders via a special resolution.

Key Thresholds for Shareholder Approval:

• Sale/purchase of goods or materials: >10% of turnover
• Leasing property: >10% of net worth
• Rendering services: >10% of turnover
• Appointment to a place of profit: remuneration > ₹2.5 lakh per month

Important: The related party cannot vote on the resolution, ensuring independence in the approval process.

Disclosure Obligations

Transparency is key in RPTs. The Companies Act mandates several disclosure channels:

a) Board's Report (Section 134)

Companies must disclose all RPTs that require board or shareholder approval in the Board’s Report in Form AOC-2.

b) Financial Statements

RPTs must be disclosed in the Notes to Accounts of financial statements, following:

• AS 18 (for non-Ind AS companies)
• Ind AS 24 (for Ind AS-compliant companies)

c) Register of Contracts (Section 189)

Every company must maintain a register of all RPTs, updated regularly and signed by all directors present at board meetings.

Filing Requirements with the ROC

1. Form AOC-2

To be attached with the Board’s Report, disclosing particulars of material RPTs.

2. Form MGT-7 (Annual Return)

Contains details of RPTs, particularly for listed companies and companies with paid-up capital exceeding specified limits.

3. Register of Related Party Contracts

Although not filed with ROC, this internal register is subject to inspection and should be well-maintained.

Are There Any Exemptions?

Yes. Some exemptions and relaxations include:

• Transactions at arm’s length and in the ordinary course of business are exempt from shareholder approval.
• Private companies, government companies, and wholly-owned subsidiaries enjoy certain procedural relaxations.
• Related parties can vote in private companies where 90% of members are relatives of promoters or directors (via MCA Notification).

Penalties for Non-Compliance

Failure to comply with Section 188 can have serious consequences:

• Voidable transactions: RPTs done without approval may be declared void.
• Refund of gain: Interested directors must return any undue gain.
• Fines and imprisonment: Listed companies may face fines up to ₹25 lakh. Directors can also face imprisonment up to one year.

Final Thoughts

Related Party Transactions, while common in many corporate setups, demand high standards of transparency, governance, and compliance. The Companies Act, 2013 has built a robust framework to prevent abuse of such transactions, safeguarding the interests of shareholders and stakeholders alike.

For companies, the key lies in:

✅ Recognizing who qualifies as a related party

✅ Ensuring proper approvals before transactions

✅ Disclosing and documenting transactions thoroughly

✅ Staying updated on evolving compliance norms