Section 188 of the Companies Act, 2013 prescribe about the related party transactions by the companies. 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.
Every transaction with a related party may not be a ‘related party transaction’ although every ‘related party transaction’ is necessarily a transaction with a related party.
Section 2 (76) of the companies act, 2013 defines a “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 1[or his relative] is a member or director;
(v) a public company in which a director or manager is a director 2[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
(C) an investing company or the venturer of the company;”
Contract or Arrangement With A Related Party
No company shall enter into below mentiomed contract or arrangement with a related party except with the consent of the board of directors given by a resolution at a meeting and subject to such conditions as may be prescribed
(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 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.