{"id":110350,"date":"2022-10-04T12:32:18","date_gmt":"2022-10-04T07:02:18","guid":{"rendered":"https:\/\/legalwindow.in\/?p=110350"},"modified":"2022-12-14T11:50:47","modified_gmt":"2022-12-14T06:20:47","slug":"related-party-transactions","status":"publish","type":"post","link":"https:\/\/www.legalwindow.in\/blog\/related-party-transactions\/","title":{"rendered":"Related Party Transactions \u2013 \u2018CA 2013\u2019 vis-\u00e0-vis \u2018SEBI LODR\u2019"},"content":{"rendered":"<p><span style=\"font-weight: 400;\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-111374 size-full\" title=\"Related Party Transactions\" src=\"https:\/\/legalwindow.in\/wp-content\/uploads\/related-party-transactions-ca-2013-vis-a-vis-sebi-lodr-1.png\" alt=\"Related Party Transactions\" width=\"1200\" height=\"630\" srcset=\"https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/related-party-transactions-ca-2013-vis-a-vis-sebi-lodr-1.png 1200w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/related-party-transactions-ca-2013-vis-a-vis-sebi-lodr-1-600x315.png 600w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/related-party-transactions-ca-2013-vis-a-vis-sebi-lodr-1-300x158.png 300w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/related-party-transactions-ca-2013-vis-a-vis-sebi-lodr-1-1024x538.png 1024w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/related-party-transactions-ca-2013-vis-a-vis-sebi-lodr-1-768x403.png 768w\" sizes=\"auto, (max-width: 1200px) 100vw, 1200px\" \/>The Companies Act,\u00a02013 was enacted to encourage businesses to adopt the &#8220;Jet Set Go&#8221; philosophy, with compliance and openness being crucial. Among the various difficulties addressed by this legislation, there has been a revolution in Related Party Transactions, a word that has made all businesses uncomfortable for many years due to the complexities involved. The definition of &#8216;Related Party&#8217; in the Companies Act, 2013 (&#8216;CA 2013&#8217;) is extremely broad and attempts to include relationships on the basis of common directors, important managerial figures, and so on. It serves as the model definition of &#8216;Related Party&#8217; in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (&#8216;SEBI LODR&#8217;). In this article we will discuss Related Party Transactions \u2013 \u2018CA 2013\u2019 vis-\u00e0-vis \u2018SEBI LODR\u2019 in brief.<\/span><\/p>\n<table style=\"width: 100%;\">\n<tbody>\n<tr>\n<td style=\"border: 1px solid #555;\"><b>Table of Content<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#Short\"><span style=\"font-weight: 400;\">Short Glimpse<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#of\"><span style=\"font-weight: 400;\">Meaning of Related Party Transactions<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#Act\"><span style=\"font-weight: 400;\">Related Party Transactions\u00a0under Companies Act,\u00a02013<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#for\"><span style=\"font-weight: 400;\">Approvals for Related Party Transactions\u00a0under Companies Act,\u00a02013<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#the\"><span style=\"font-weight: 400;\">Exemptions for Related Party Transactions under the Companies Act, 2013<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#SEBI\"><span style=\"font-weight: 400;\">Related Party Transactions\u00a0under SEBI LODR<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#LODR\"><span style=\"font-weight: 400;\">Exemptions for Related Party Transactions under SEBI LODR<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#Party\"><span style=\"font-weight: 400;\">Importance of Related Party Transactions<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#before\"><span style=\"font-weight: 400;\">Challenges before Listed Entities\u00a0<\/span><\/a><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><a href=\"#Takeaway\"><span style=\"font-weight: 400;\">Takeaway<\/span><\/a><\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h2 id=\"Short\"><b>Short Glimpse<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Prior to SEBI LODR, entities belonging to the promoter or promoter group of a listed entity and owning 20% or more of the shares of the listed entity were considered related parties. With effect from April 1, 2022, this definition has been updated, and anyone or any entity that is a promoter or promoter group of a listed entity will now be considered to be a &#8220;Related Party,&#8221; regardless of shareholding, with some deeming fiction to cover entities holding equity shares of 10% or more (effective from April 1, 2023) in a listed entity, either directly or indirectly, at any time during the immediately preceding fiscal year, as defined in Section 89 of the Companies Act, 2013. In order to provide proper disclosure to the pertinent stakeholders, the term of &#8220;Related Party&#8221; has been greatly enlarged overall.<br \/>\n<\/span><span style=\"font-weight: 400;\">Let us first take a brief overview of Related Party Transactions, before we shall be discussing its relation with <\/span><span style=\"font-weight: 400;\">SEBI<\/span><span style=\"font-weight: 400;\"> LODR and Companies Act, 2013.<\/span><\/p>\n<h2 id=\"of\"><b>Meaning of Related Party Transactions<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">A &#8220;Related Party Transaction&#8221; is a deal or agreement between two parties who have a previous professional connection or shared interest. Companies frequently look to do <\/span><span style=\"font-weight: 400;\">business<\/span><span style=\"font-weight: 400;\"> with people they know or with people with whom they have interests. Related Party Transactions may produce conflicts of interest or result in other unlawful circumstances, despite the fact that they are lawful in and of themselves. These transactions must be disclosed by a <\/span><a href=\"https:\/\/legalwindow.in\/public-limited-company\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">public company<\/span><\/a><span style=\"font-weight: 400;\">.<br \/>\n<\/span><span style=\"font-weight: 400;\">An agreement between two parties with an established commercial connection is referred to as a Related Party Transaction. Regulatory authorities carefully review Related Party Transactions because some of them, but not all of them, have an inherent potential for conflicts of interest. Abuse of Related Party Transactions might result in fraud and total financial catastrophe for all parties involved if it is not controlled.<br \/>\n<\/span><span style=\"font-weight: 400;\">Let us understand the concept of Related Party Transaction in relation to the Companies Act, 2013, and SEBI LODR Regulations.<\/span><\/p>\n<h2 id=\"Act\"><b>Related Party Transactions\u00a0under Companies Act,\u00a02013<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">According to Section 188 of the Companies Act, 2013 read with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 (the &#8220;CA Rules 2014&#8221;), a company is not permitted to enter into a contract or other agreement with a related party without the Board&#8217;s or the shareholders&#8217; prior approval, as applicable:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Shareholder approval is necessary for Related Party Transaction that represents 10% or more of the company&#8217;s revenue when it comes to the sale, acquisition, or supply of any products or materials, whether directly or via the appointment of any agent.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Selling, giving away, or buying any sort of property, either directly or by designating a representative, will require shareholder approval if the Related Party Transaction is worth 10% or more of the company&#8217;s net value.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Any type of property leasing requires shareholder approval if the Related Party Transaction is worth 10% or more of the company&#8217;s annual revenue.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In order to receive or provide any services, either directly or through the appointment of an agent, shareholder approval is necessary if the Related Party Transaction represents 10% or more of the company&#8217;s annual revenue.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If the related party&#8217;s monthly compensation exceeds INR 2.5 Lacs, shareholder approval will be necessary before the related party may be appointed to any office or position of profit inside the company, its subsidiary, or associate company.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Shareholder approval will be required for Related Party Transaction worth 1% of the Company&#8217;s net worth in order to fund or underwrite the subscription of any securities or derivatives owned by the Company.<\/span><\/li>\n<\/ul>\n<h2 id=\"for\"><b>Approvals for Related Party Transactions\u00a0under Companies Act,\u00a02013<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Prior permission of the following is necessary whenever a Company participates in any Related Party Transactions:<\/span><\/p>\n<p><b>Board of Directors: <\/b>Every Related Party Transaction that a Company engages in is subject to prior Board of Directors approval under Section 188 of the Companies Act, 2013. With the proviso that if a director has any interest in a transaction or arrangement with a linked party, they must abstain from the meeting while it is being considered.<br \/>\nHowever, if a director is engaged in a contract or arrangement that is covered by Section 184(2) of the Companies Act, 2013 and is not covered by Section 188(1) of the Companies Act,\u00a02013, the director may participate in the Resolution under the following situations:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">After interest declaration in the case of a private company or specific IFSC company.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">When a <\/span><a href=\"https:\/\/legalwindow.in\/section-8-company-npo\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Section 8 Company<\/span><\/a><span style=\"font-weight: 400;\"> is involved and the transaction value is less than INR 1 lakh.<\/span><\/li>\n<\/ul>\n<p><b>Shareholders: <\/b><span style=\"font-weight: 400;\">Any Related Party Transaction that a company engages in that is more than the aforementioned restrictions requires shareholder approval through a special resolution. However, a related party company member is not permitted to cast a vote at the general meeting on a motion to approve the Related Party Transaction unless:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It is a private company with a specified IFSC; or<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A company in which 90% or more of the members are relatives of the promoters or related parties.<\/span><\/li>\n<\/ul>\n<p><b>The Audit Committee: <\/b><span style=\"font-weight: 400;\">Transactions involving related parties must be approved in line with Section 177(4) (iv) of the Companies Act, 2013, and Rule 6A of the Companies Act Rules 2014. Furthermore, in the company&#8217;s interest, the Audit Committee may provide omnibus approval for Related Party Transactions presented by the company, subject to the following conditions:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Audit Committee will describe the criteria for making the omnibus approval after gaining permission from the Board of Directors.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Audit Committee will consider the following aspects while formulating the criteria for omnibus approval: &#8211;<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The nature of the transactions (past or present); and<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The reasoning for the omnibus request.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The following items must be included or indicated in the omnibus approval: &#8211;<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">\u00a0The names of the parties involved;<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">\u00a0Transaction kind and duration;<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">\u00a0The maximum number of transactions that can be conducted;<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">\u00a0Any price-variation mechanism, as well as the indicative base price, presently contracted price, and<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Any additional material deemed appropriate by the audit committee.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">When the need for Related Party Transactions cannot be foreseen and the aforementioned information is not available, the Audit Committee may issue omnibus clearance for such transactions with a value not exceeding INR 1 Crore per transaction.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Because an omnibus approval is only valid for one fiscal year, a new approval will be required after the end of the fiscal year. The Audit Committee, on the other hand, cannot provide omnibus approval for transactions involving the sale or disposal of a company&#8217;s undertaking.<\/span><\/li>\n<\/ul>\n<h2 id=\"the\"><b>Exemptions for Related Party Transactions under the Companies Act, 2013<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Under the Companies Act,\u00a02013, the following exemptions are allowed for Related Party Transactions:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If the company enters into a transaction in the ordinary course of business and on an arm&#8217;s length basis, neither the board nor the shareholders must authorize it.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Transactions between a holding company and its wholly-owned subsidiary whose accounts are consolidated do not require shareholder approval, even if they exceed the limit; instead, the holding company&#8217;s resolution will suffice for the transaction&#8217;s purposes.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Even if the limitations are exceeded, no shareholder approval is required in the case of a Government company where:<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Contracts or agreements it has signed with any other government agency, whether state or central or a combination of the two; or<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The appropriate ministry grants permission and the company is a government entity that is not publicly traded.<\/span><\/li>\n<\/ul>\n<h2 id=\"SEBI\"><b>Related Party Transactions\u00a0under SEBI LODR<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The term &#8220;Related Party&#8221; now refers to more than only transactions involving listed companies and subsidiaries and their related parties. This implies that even if a listed company\u00a0is not a party to a subsidiary&#8217;s RELATED PARTY Transactions, it must nevertheless comply with the approval and disclosure responsibilities.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Starting on April 1, 2023, the term now covers certain kinds of unrelated transactions as RELATED PARTY Transactions, i.e., transactions whose objective is to benefit a related party of the listed companies or any of its subsidiaries. Related Party Transaction is defined as any transfer of assets, liabilities, or services between a listed entity and a related party, whether or not a price is imposed, under Regulation 2(1) (zc) of the modified SEBI LODR.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The inclusion of transactions that directly or indirectly benefit a listed entity elevates the idea of RELATED PARTY TRANSACTIONs under the modified SEBI LODR above the definition under the Companies Act, 2013. This concept might be developed to oppose the use of complex arrangements to move monies from listed entities to parties that look unconnected but are actually designed to benefit the listed entity or its linked parties. As a result, because the updated SEBI LODR do not offer such an exemption, transactions conducted in the usual course of business and at arm&#8217;s length and subject to the restrictions of the Companies Act, 2013 will now be scrutinized.<\/span><\/p>\n<h2 id=\"LODR\"><b>Exemptions for Related Party Transactions under SEBI LODR<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Under the SEBI LODR, the following exemptions are allowed for Related Party Transactions:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Priority issuance of certain securities in compliance with the SEBI (Capital and Disclosure Requirements) Regulations, 2018;<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Dividend offers, subdividing or consolidating securities, awarding rights or bonuses, or stock buybacks issued uniformly to all shareholders;<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Banks and NBFCs accept fixed deposits at consistently applicable conditions.<\/span><\/li>\n<\/ul>\n<h2 id=\"Party\"><b>Importance of Related Party Transactions<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">A transaction was formerly considered substantial during a fiscal year if it exceeded 10% of the listed entity&#8217;s yearly consolidated turnover as stated in its most recent audited financial statement. However, under the amended definition, Related Party Transactions would be considered large only if the total value of all transactions completed within a fiscal year, whether conducted separately or in combination, exceeded INR 1,000 crores or 10% of the listed entity&#8217;s annual consolidated sales, whichever was lower. This financial barrier intends to include high-value business transactions that might otherwise fall below the 10% mark.<\/span><\/p>\n<h2 id=\"before\"><b>Challenges before Listed Entities\u00a0<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Due to the link between company size in terms of turnover and the number of approvals required from shareholders and the Audit Committee, listed entities may soon encounter a number of practical challenges related to strict scrutiny, which could result in increased costs and a significant increase in compliance burden.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The Audit Committee is now required to define &#8220;Material Modification&#8221; (a term that is not defined in the modified rule) and evaluate Related Party Transactions even when the party is not a listed company but a subsidiary, adding to its already extensive list of responsibilities.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There isn&#8217;t a clear description of what this test of the purpose of benefit would entail, despite the fact that <a href=\"https:\/\/www.sebi.gov.in\/\" target=\"_blank\" rel=\"noopener\">SEBI<\/a> has determined that any transactions with third parties that have the goal of benefiting a related party or that have that consequence are Related Party Transactions. Determining the purpose and impact of any such transaction that would benefit a connected party of the listed company or any of its subsidiaries will be difficult, though.<\/span><\/p>\n<h2 id=\"Takeaway\"><b><a href=\"https:\/\/legalwindow.in\/dir-3-kyc-of-directors\/\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-110362 size-full\" title=\"DIR-3 KYC of Directors of Company\" src=\"https:\/\/legalwindow.in\/wp-content\/uploads\/Get-DIR-3-KYC-done-for-directors-in-1000-All-Inclusive.-1.png\" alt=\"DIR-3 KYC of Directors of Company\" width=\"1000\" height=\"200\" srcset=\"https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/Get-DIR-3-KYC-done-for-directors-in-1000-All-Inclusive.-1.png 1000w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/Get-DIR-3-KYC-done-for-directors-in-1000-All-Inclusive.-1-600x120.png 600w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/Get-DIR-3-KYC-done-for-directors-in-1000-All-Inclusive.-1-300x60.png 300w, https:\/\/www.legalwindow.in\/blog\/wp-content\/uploads\/Get-DIR-3-KYC-done-for-directors-in-1000-All-Inclusive.-1-768x154.png 768w\" sizes=\"auto, (max-width: 1000px) 100vw, 1000px\" \/><\/a>Takeaway<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">As the economy becomes more globalized, more and more of the various operations involved in the production, sale, and distribution of goods or services are handled by independent entities within a multinational group, and the flow of goods and services through intercompany transactions frequently involves two or more nations. In these situations, related party transactions become extremely significant for a <\/span><span style=\"font-weight: 400;\">company<\/span><span style=\"font-weight: 400;\">, especially given the wide-ranging ramifications they have.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you want to learn more about Related Party Transactions, contact our experts at <\/span><a href=\"https:\/\/legalwindow.in\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Legal Window<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Companies Act,\u00a02013 was enacted to encourage businesses to adopt the &#8220;Jet Set Go&#8221; philosophy, with compliance and openness being crucial. Among the various difficulties addressed by this&hellip;<\/p>\n","protected":false},"author":3,"featured_media":111375,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-110350","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-miscellaneous"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Related Party Transactions &#187; Legal Window<\/title>\n<meta name=\"description\" content=\"This article briefly describes the Approvals, Importance &amp; Exemptions for Related Party Transactions\u00a0under Companies Act,\u00a02013.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalwindow.in\/blog\/related-party-transactions\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Related Party Transactions &#187; 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