Transactions with Related Parties in case of companies – Easy Guide FY 2020 Onwards

This article is detail guide on what are Transactions with Related Parties, definition of related parties, procedure to be followed in case of transaction with related parties, mandatory reporting to ROC and compliance of the Act.

Definition of Related Party

As per Sec 2(76) of the Companies Act, Related Party with reference to company means :

1. Director and his/her relatives
2. key managerial personnel (KMPs) and his/her relatives
3. Firm, Partner is relative to director or manager
4. Private company in which a director or manager is a member or director
5. Public company in which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up share capital
6. 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.
7. Any person on whose advice, directions or instructions a director or manager is accustomed to act
8. Any company which is—
   • holding, subsidiary or an associate company of such company; or
   • A subsidiary of a holding company to which it is also a subsidiary
9. As prescribed.

As per Sec 2(77) of the Companies Act, Related Party with reference to any person means :

1. Members of HUF
2. Husband and Wife
3. Brother and Sister
4. Son and Daughter in law
5. Daughter and son in law
6. As prescribed

Transactions with Related Parties

As per Sec 188, of the Companies Act, 2013, following Transactions with Related Parties and limits are provided.

Related Party Transaction as per Sec 188	Special Resolution by Members if transaction exceed below limits
Sale, purchase or supply of any goods or materials.	10% of the turnover or 100 crores, whichever is lower for transaction directly or with agent
Selling or otherwise disposing of, or buying, property of any kind.	10% of the turnover or 100 crores, whichever is lower for transaction directly or with agent
Leasing of property of any kind.	10% of the turnover or 100 crores, whichever is lower for transaction directly or with agent
Availing or rendering of any services.	10% of the turnover or 50 crores, whichever is lower for transaction directly or with agent
Appointment of any agent for purchase or sale of goods, materials, services or property.	–
Such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company.	Monthly remuneration exceeding Rs 2,50,000
Underwriting the subscription of any securities or derivatives of the company.	Remuneration exceeding 1% of the net worth

Procedure to be followed for Transactions with Related Parties

• Board Resolution to be passed for all related party transaction. Please note, if transaction is in ordinary course of business and at arm’s length price no board resolution required.
• Special Resolution to be passed by members of the company if related party transaction exceeds the limits prescribed above. ( If member is related party no vote should be made by him/her)
• Board Report should reflect every contract or arrangement of any of transactions with related parties along justification.
• Register of contract or arrangements for transaction with related parties of director should be maintained and after updating the details should be signed by board of directors in coming board meeting.
• ROC Form MGT-14 (Filing of Resolutions and agreements to the Registrar) will be filed with ROC. For MCA Portal link refer >> https://www.mca.gov.in/content/mca/global/en/home.html

What is an example of transactions with related parties?

Few examples are :

1. Transactions with entity/person in which director is interested.
2. Transaction with holding or subsidiary companies.

Reach out to our experts at TaxLedgerAdvisor for consultancy for Transactions with Related Parties

Reach out to our experts at TaxLedgerAdvisor for consultancy for Transactions with Related Parties in Udaipur and Rajasthan.

Also refer other articles from Tax Ledger Advisor >>

https://www.taxledgeradvisor.com/company-registration/

https://www.taxledgeradvisor.com/annual-compliances-for-private-limited-companies/