Related Party Transaction (RPT) under Section 188 of the Companies Act, 2013

A contract or arrangement by a company with the person who is covered under Related Party (list is given below) 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 the purchase or sale of goods, materials, services, or property;

(f) such 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:

Point to be remember:

• Every RPT requires the consent of the Board of Directors to be given by a resolution at a meeting of the Board and certain transactions beyond the threshold limits (List given below) shall require the approval of the members of the company.
• No member of the company other than a private company shall vote on such resolution to approve any contract or arrangement which may be entered into by the company if such member is a related party.
• Provisions shall not be applicable to any transactions entered into by the company in its ordinary course of business provided it must be at an arm’s length basis.
• Member’s approval 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.
• Contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or members, and if it is not ratified by the Board or by the members within three months from the date of entering into such contract or arrangement, such contract or arrangement shall be voidable at the option of the Board or members.
• Transactions conducted and carried out in a fair, justiciable manner without any trace of the influence of the parties’ relation upon itself it is known as a transaction at arm’s length.

Further as per The Companies (Meetings of Board and its Powers) Rules, 2014

The following are transactions and threshold limits, for related party transactions which require approval by special resolution, under Section 188 of the Act:

a) sale, purchase, or supply of any goods or material, directly or through the appointment of an agent, amounting to ten percent or more of the turnover of the company

b) selling or otherwise disposing of or buying property of any kind, directly or through the appointment of an agent, amounting to ten percent or more of the net worth of the company

c) leasing of property of any kind amounting to ten percent or more of the turnover of the company

d) availing or rendering of any services, directly or through the appointment of an agent, amounting to ten percent or more of the turnover of the company

e) appointment to any office or place of profit in the company, its subsidiary company, or associate company at a monthly remuneration exceeding two and a half lakh rupees

f) remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding one percent of the net worth.

Further as per Clause 76 of Section 2 of the CA 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 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 and holds is a director or 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 company which is—

(A) a holding, subsidiary, or an associate company of such company; or

(B) a subsidiary of a holding company to which it is also a subsidiary;

(C) an investing company or the venturer of the company

(ix) a director (other than an independent director) or key managerial personnel of the holding company or his relative