TABLE OF CONTENTS

1. Introduction---------------------------------------------------------------------------------------------------------- 1
2. Related Party--------------------------------------------------------------------------------------------------------- 1
3. Categories of Related Party Transactions--------------------------------------------------------------------- 3
4. Role of Audit Committee in Related Party Transactions-------------------------------------------------- 5
5. Related Party Transactions as per SEBI LODR, 2015--------------------------------------------------------6
6. Loans to Directors--------------------------------------------------------------------------------------------------- 7
RELATED PARTY AS PER COMPANIES ACT, 2013 & SEBI LODR(LISTING
OBLIGATIONS & DISCLOSURE REQUIREMENT), 2015

1. Introduction

Related Party as the name suggest is a contract, arrangement or a transaction involving a

company, it’s holding company, subsidiary company, joint venture company, an associate
company or a parent company which is either owned, managed, controlled or significantly
influenced by a company, an entity or a person who is a related party as defined under
section 2(76) of the Companies Act, 2013.

2. Related Party

According to section 2(76) of Companies Act, 2013 ‘Related Party’ with reference to a
company means –

For this purpose we are going to assume ‘A’ Company, Director of A company is Amar,
Akbar is it’s Key Managerial Personnel (KMP)

1. A Director or his Relative A company is entering into a contract

with Amar or his relative

2. KMP or his Relative A company is entering into a contract

with Akbar or his relative

3. A Firm in which director, manager or his A company is entering into a contract

relative is a partner with a firm in which either Amar or
Akbar or his relative is a partner

4. A Private Company in which a director or A company is entering into a contract

manager or relative is a member or director with a Private company in which either
Amar or Akbar or his relative is a
member or director

5. A Public Co. In which a director or manager is A company is entering into a contract

a director and holds along with his relatives, with a Public company in which Amar

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 more than two percent of it’s paid up share or Akbar is a director and it holds
capital together with it’s relative more than
2% of the paid up share capital

6. Any Body Corporate whose Board of directors, A company is entering into a contract
Managing Director or Manager is accustomed with a Body corporate in which the
to act in accordance with the advice, directions Board of directors, Managing director
or instructions of a director or manager or Manager is accustomed to act in
accordance with the advice, directions
or instructions of Amar or Akbar

7. Any Person on whose advice, directions or A Co. Is entering into a contract with a
instructions a director or manager is person on whose advice or
accustomed to act except while acting in instructions Amar or Akbar are
professional capacity accustomed to act.

8. A Holding, Subsidiary or an Associate A company is entering into a contract

company of such company with it’s Holding, Subsidiary or an
Associate company.

9. Any company which is a Subsidiary of a A company is entering into a contract

Holding company to which it is also a with a subsidiary company which is
Subsidiary also a subsidiary of A’s Holding
company.

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 3. Categories of Related Party Transactions

Following are the Broad categories of Related Party Transactions as per section 188 of
Companies Act, 2013 read with The Companies (Meeting of Board and it’s Powers) Rule
2014 that requires prior approval of Board of Directors or approval from Shareholders if the
value of the transaction exceeds the prescribed threshold limit mentioned below.

Sr. Related Party Transactions as per Companies Related Party Transactions requiring
Act, 2013 requiring approval by Board Resolution prior approval by passing Ordinary
No.
resolution as per Rule 15 of
Companies Meeting of Board and it’s
Powers Rules, 2014

1. Sale, purchase or supply of any goods or amounting to Ten percent or more of

materials directly or through an agent appointed the Turnover of the company

2. Selling or otherwise disposing of, or buying, Amounting to Ten percent or more of

property of any kind directly or through an agent the Networth of the company
appointed

3. Leasing of property of any kind directly or through Amounting to Ten percent or more of
an agent appointed the turnover of the company

4. Availing or rendering of any services directly or Amounting to Ten percent or more of

through an agent appointed the Turnover of the company

5. Appointment of a Related party to hold any office At a Monthly Remuneration exceeding

or place of profit in the company, it’s subsidiary Two and a Half Lakh rupees
company or associate company.

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Important points to be noted :

⮚ The threshold limit of Turnover or Net Worth shall be computed on the basis of
preceding year’s Audited Financial Statement.

⮚ No Member shall be allowed to vote to approve the transaction or arrangement to

which he is a Related Party.

⮚ Prior approval of the Board of Directors or shareholder is not required if the

transaction has been entered into by the company in the ordinary course of the
business at arms length.

⮚ Wholly owned subsidiary is not required to pass resolution for the transaction entered
with it’s holding company provided the holding company has passed the resolution
for such transaction or where the accounts of the holding company and wholly owned
subsidiary company are consolidated and approved by the shareholders

⮚ Transactions or arrangements between two Government companies.

⮚ ‘Relative’ means and includes

a. Father including step-father

b. Mother including step-mother

c. Son including step-son

d. Son’s wife

e. Daughter

f. Daughter’s husband

g. Brother including step-brother

h. Sister including step-sister

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4. Role of Audit Committee in Related Party Transactions

i. As per Rule 6A.of Companies (Meetings of Board and it’s Powers) every Related
party transaction shall require approval of Audit Committee

ii. The Audit committee may make Omnibus approval for related party transactions
proposed to be entered into by the company, provided that it should satisfy itself that
such approval is in the interest of the company

iii. The Audit committee shall after obtaining approval of Board of directors shall specify
the following criteria for obtaining Omnibus approval :-

● Maximum value per transaction that can be allowed

● Extent and manner of disclosures to be made to the Audit committee for

seeking such approval

● Review, at such intervals as the Audit committee deems fit, related party
transactions entered into by the company pursuant to Omnibus approval
granted

● Transaction not following under the purview of Omnibus approval by the Audit
committee

iv. The Audit committee shall consider the following while specifying requirements of
Omnibus approval

● Repetitive nature of transaction

● Justification for the need of Omnibus approval

v. Omnibus approval granted by the Audit committee shall specify or include the
following

● Name of the Related Parties

● Nature and duration of the transaction

● Maximum amount of transaction that can be entered into

● Indicative base price or current contracted price and the formula for variation
in price if any

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 ● Any other relevant information of the essence for the Audit committee to take
an informed decision on the proposed transaction

Where the above details cannot be ascertained or where the Audit committee is
unable to foresee the need for such a transaction, the Audit committee can grant
Omnibus approval for such a transaction provided that the value of transaction does
not exceed One crore rupees (1 crore).

vi. Omnibus approval granted by the Audit committee shall be valid for a period of One
Financial year and shall be subject to renewal upon expiry.

5. Related Party Transactions as per SEBI LODR, 2015

1. As per SEBI LODR Regulation 2(1) (zb) ‘related party’ means a related party as
defined under section 2(76) of the Companies Act, 2013.

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

3. The listed entity shall formulate a policy on the materiality of the related party
transactions and on dealing with related party transactions, including the clear
threshold limits duly approved by the Board of directors.

4. Materiality of the transaction with related party is identified if the transaction to be

entered into, individually or taken together with previous transactions during a
financial year, exceeds ten percent (10%) of the total consolidated turnover of the
listed entity as per the last audited financial statement of the listed entity.

5. However with effect from July 01, 2019 a transaction with related party involving
payment pursuant to brand usage or royalty shall be considered material if the
transaction entered into, individually or taken together with previous transactions
during a financial year exceeds five percent (5%) of the annual turnover of the listed
entity as per the last audited financial statement.

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Illustration

A company ABC Limited, listed entity, entered into a contract with a related party namely
XYZ Limited for an amount of Rs. 26 Cr. The Turnover of ABC Limited is Rs.240 Cr on
standalone basis and after considering consolidation of subsidiaries & associates is Rs.290
Cr. Advice whether the transaction is a related party transaction or not.

Answer :

In the above case ABC Limited has a consolidated turnover of Rs.290 Cr. And therefore, the
threshold for materiality would be Rs. 29 Cr. for a transaction with a related party .

In the given case ABC Limited has not entered into any transaction during the financial year
2022-2023, which crosses the overall limit of Rs.29 Cr. including the existing Rs.26 Cr.
transaction then it is not a material related party transaction.

6. Loans to Directors
I. For this section loan means granting of loan, providing guarantee or security and
loan which is shown as or represented as a book debt.

II. As per section 185 of Companies Act, 2013 a company is prohibited from granting
any loans to

● Any director of a company, director of it’s holding company or any partner or

relative of any such director

● Any Firm in which such director or it’s relative is a partner

III. For this purpose we are assuming company granting the loan is X company, the
director of X company is James, Holding company of X is Y company and director of
Y company is Daniel.

● X company cannot grant loan to James or his relative or partner of James

● X company cannot grant loan to Daniel or his relative or his partner

● X company cannot grant loan to any Firm in which either James or Daniel or
their partner or relative is a partner in that Firm.

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IV. In the following cases company can grant loans to another company or body
corporate in whom any of the directors of the companies are interested by passing a
Special Resolution and the company to whom such loan is granted shall utilise the
amount for Principal Business activity only, A company can grant loan to

● A Private company in which director of lending company is a director or

member

● A body corporate in which either 25% or more of the total voting power is
held by director of the lending company or by two or more such directors
together.

● A body corporate in which the Board of directors, Managing director or

Manager works according to the directions or instruction of the director of
lending company.

V. Let us understand this with the above illustration

● X company can grant loan to any Private company in which either James or
Daniel is a director or member.

● X company can grant loan to any body corporate in which either James or
Daniel or any other directors of X or Y company holds 25% or more of the
total voting power either singly or jointly

● X company can grant loan to a body corporate in which the Board of

directors, Managing director or Manager works according to the director of X
company.

VI. Exception to Section 185

Under the following cases granting of loan is neither Prohibited nor requires passing
of Special Resolution

● Loans are granted to the Managing Director, Whole time director, Manager
under the terms of employment or under a scheme framed by the company
with the approval of Shareholders by passing Special Resolution.
● Where the Principal nature of the business of the company is granting of loans
(eg. Banking company, Financial Institutions etc.) and the loans are granted in

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 the ordinary course of the business by charging regular rate of interest/at arms
length rate.
● A Holding company can provide loan, guarantee or security to it’s Wholly
owned subsidiary company provided that the wholly owned subsidiary
company should utilise the loan amount for it’s principal business activity.
● A Holding company can provide guarantee or security to it’s subsidiary
company provided that the subsidiary company utilises the amount for it’s
principal business activity.

VII. Exemption from section 185

The following companies are exempted from the compliance of section 185
provided it fulfils the specified conditions –

● A Private company provided it does not have any of it’s member a company or
a body corporate (i.e. members should be Individuals only), the borrowings by
the Private company should not exceed twice it’s Paid up share capital or Fifty
crore rupees, whichever is lower and the company should not have made any
default in the repayment of the above borrowings.
● A Nidhi company can grant loan to it’s Directors or Relatives of the directors
provided they are the members of the company and the company has
mentioned about the loans in it’s annual accounts.
● A Government company provided it takes the approval from the concerned
ministry.