RELATED PARTY TRANSACTION
(As per Guidance Notes on Related Party Transaction)
- 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.
- 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.
As per Section 2(76) of the Companies Act 2013, ‘related party’, with reference to a 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 relative is a parterner;
(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 per cent 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
- ( ) 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.
(XI ) such other person as may be prescribed.”
As per the Accounting Standards – 18 Related Party
Parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and /or operating decision.
As per the Indian Accounting Standards (Ind AS)
A related party is a person or entity that is related to the entity that is preparing its Financial Statement (in this standard referred as the ‘reporting entity’ )
- ( a) A person or a close member of that person’s family is related to a reporting entity if that person:
- (i) has control or joint control over the reporting entity;
- (ii) has significant influence over the reporting entity;
- (iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
- (b) An entity is related to a reporting entity if any of the following conditions apply:
(i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.
(vi)The entity is controlled or jointly controlled by person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
(viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.
What are Related Party Transactions?
Related party transactions mean contracts or arrangements between a company and its related parties with respect to transactions covered in Section 188 of the Companies Act 2013.
The expression ‘contract or arrangement’ has different connotations under the Act. While ‘contract’ envisages a written / formal binding document, ‘arrangement’ may be with or without a written document.
Section 188 of the Act lists out few specified related party transactions such as sale, purchase or supply of goods or materials, selling, buying or leasing of property of any kind and availing or rendering of any services.
As per Accounting Standard (AS) – 18, ‘Related Party Transaction’ is a transfer of resources or obligations between related parties, regardless of whether or not a price is charged.
Indian Accounting Standard (IND AS) – 24 defines the term ‘related party transaction’ as a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.
Disclosures
Disclosures of details of Relatives by Directors and others
Every director must disclose to the company, details of his relatives preferably along with disclosure of his interest, as follows:
- At the first meeting of the Board in which he participates as Director.
- Whenever there is any change in the disclosures already made, within 30 days or at the first Board meeting held after such change, whichever is earlier.
- Key managerial personnel other than directors should also disclose details of their relatives within 30 days of joining the company or upon any change thereafter.
- The company should maintain a register to record the details of the relatives of the persons mentioned above. Such register should be kept at the registered office of the company in the custody of the Company Secretary or any other person authorized by the Board for the purpose and shall be preserved permanently.
- Further, the company may develop a system to enable it to capture the names of such relatives in transactions entered or to be entered into by the company in order to enable it to identify related party transactions.
Disclosures of Related Party Transactions As per the Act
Section 134(3 ) of the Act read with Rule 8(2) of the Companies (Accounts) Rules, 2014 requires all companies to disclose in the Board’s Report, particulars of contracts or arrangements with related parties in Form AOC-2.
Further, in terms of Section 177(8), where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in Board’s report along with the reasons thereof.
Form AOC-2 has been prescribed for disclosure of particulars of contracts/ arrangements entered into by the company with related parties referred to in sub-section (7) of Section 188 of the Act including certain arms length transactions under the third proviso thereto.
Form AOC-2 requires disclosure of (a) related party transactions which are entered into not on arm’s length basis and (b ) material related party transactions which are entered into on arm’s length basis.
Thank You
Prepared and complied by
Pushkar Gaur
Kotwani Anil Kumar & Associates (KAKA)
Chartered Accountants
A-73, Lajpat Nagar-2,
New Delhi-110024
Disclaimer: Above article is true and complete to the best of our knowledge. It is our interpretation of law, others may take different opinion or view. |
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