Who are Related Parties (RP)?

The term “Related Party” is defined under Section 2(76) of the Companies Act, 2013. In general, it includes:

(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 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 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;”;

Note: The investing company or the venture 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.

(ix) such other person as may be prescribed

A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:-

(1) Father: Provided that the term “Father” includes step-father.

(2) Mother: Provided that the term “Mother” includes the step-mother.

(3) Son: Provided that the term “Son” includes the step-son.

(4) Son’s wife.

(5) Daughter.

(6) Daughter’s husband.

(7) Brother: Provided that the term “Brother” includes the step-brother;

(8) Sister: Provided that the term “Sister” includes the step-sister.

Conditions subject to which Contract or Arrangement to be entered with a Related Party

A company shall enter into any contract/arrangement with related party subject to following conditions:

1) Agenda of Board meeting at which resolution is proposed to be moved shall disclose-

a) Name of related party & nature of relationship

b) Nature, duration of contract & particulars of contract/arrangement

c) Material terms of contract/arrangement incl. value, if any

d) Any advance paid/received for contract/arrangement, if any

e) Manner of determining pricing & other commercial terms, both included as part of contract & not considered as part of contract

f) Whether all factors relevant to contract have been considered, if not, details of factors not considered with rationale for not considering those factors

g) Any other info relevant for Board to take a decision on proposed transaction

Where any director is interested in any contract/arrangement with a related party, such director shall not be present at meeting during discussions on subject matter of resolution relating to contract/arrangement

Approvals Required for RPT

Board Approval

No company shall enter into any contract or arrangement with a related party, in the case of a company having a paid-up share capital less than the amount listed, or transactions exceeding sums, as prescribed, except with the consent of the Board of Directors given by a resolution at a meeting of the Board.

This requirement applies unless the transaction is:

• In the ordinary course of business; and
• At arm’s length basis.

Requirement for Reporting in Board’s Report (Section 188(2))

Every contract or arrangement entered with a related party that falls under the scope of Section 188 must be disclosed in the Board’s Report to shareholders. The report must include:

• The nature of the relationship
• The particulars of the transaction
• The justification for entering into the transaction

This requirement ensures transparency and enables shareholders to assess whether the company’s resources are being used prudently.

Shareholder’s Approval

The types of transactions requiring prior approval of company by a resolution:

(i) sale, purchase or supply of any goods or material, directly or through appointment of agent, amounting to ten percent or more of the turnover of the company, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188

(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten percent more of net worth of the company, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;

(iii) leasing of property any kind amounting to ten percent or more of the turnover of the company, as mentioned in clause (c) of sub-section (1) of section 188:

(iv) availing or rendering of any services, directly or through appointment of agent, amounting to ten percent or more of the turnover of the company as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188.

(v) appointment of any agent for purchase or sale of goods, materials, services or property;

(vi) such related party’s 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 as mentioned in clause (f) of sub-section (1) of section 188.

(vii) underwriting the subscription of any securities or derivatives thereof, of the company exceeding one percent of the net worth as as mentioned in clause (g) of sub-section (1) of section 188.

Note: The turnover or net worth referred in the above sub-rules shall be computed on the basis of the audited financial statement of the preceding financial year.

• These conditions 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 for approval
• If the value of a related party transaction crosses specified monetary thresholds, prior approval of shareholders through a Resolution is required. Interested related parties are restricted from voting on the resolution. This shall not be applicable to a company in which ninety per cent or more members, in number, are relatives of promoters or are related parties.

Omnibus Approval

All related party transactions shall require approval of Audit Committee and Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to conditions prescribed in Rule 6A of Companies (Meetings of Board and its Powers) Rules, 2014

The Audit Committee shall, with Board approval, set criteria for omnibus approval, including:

a) Maximum transaction value per year and per transaction

b) Disclosure requirements to AC for approval requests

c) Review of related party transactions (RPTs) under omnibus approval

d) Transactions that cannot be approved via omnibus route

Note:

• The Committee while setting criteria for omnibus approval must consider repetitiveness of transactions.
• The omnibus approval must specify names of related parties, nature and duration of transactions, and pricing terms
• The approval is valid only for one financial year and must be renewed annually
• Omnibus approval cannot be granted for selling or disposing of the company’s undertaking
• The committee must ensure omnibus approval is necessary for repetitive transactions and in the company’s interest.

The Audit Committee ensures oversight, fairness, and alignment of RPTs with the company’s interests.

Related Party Transaction in case of Listed Company as per SEBI (LODR) Regulations, 2015:

Regulation 23 – Related Party Transactions

• Every listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions, including clear threshold limits approved by the Board of Directors. This policy shall be reviewed by the Board at least once every three years and updated accordingly.
• A transaction with a related party shall be considered material if the value of such transaction(s), individually or taken together with previous transactions during a financial year, exceeds ₹1,000 crore or 10% of the annual consolidated turnover of the listed entity, whichever is lower.
• Notwithstanding the above, with effect from July 1, 2019, any transaction involving payments made to a related party with respect to brand usage or royalty shall be deemed material if such payments exceed 5% of the annual consolidated turnover of the listed entity as per the last audited financial statements.
• All related party transactions and subsequent material modifications shall require prior approval of the Audit Committee of the listed entity. Only independent directors on the Audit Committee shall approve such transactions.
  • The Audit Committee shall define “material modifications” and disclose it as part of the related party policy.
  • Where a subsidiary enters into a related party transaction and the listed entity is not a party, prior approval of the listed entity’s Audit Committee is required if the value exceeds 10% of the annual consolidated turnover of the listed entity.
  • With effect from April 1, 2023, such approval shall be required if the value exceeds 10% of the annual standalone turnover of the subsidiary.
  • Prior approval of the Audit Committee of the listed entity shall not be required if the listed subsidiary itself is subject to Regulation 23 and Regulation 15(2). For unlisted subsidiaries of such listed subsidiaries, approval by the listed subsidiary’s Audit Committee shall suffice.
• The Audit Committee may grant omnibus approval for related party transactions subject to the following conditions:
  • Criteria for granting omnibus approval shall be in line with the policy on related party transactions and applicable only to repetitive transactions.
  • The Audit Committee shall ensure such approvals are in the interest of the listed entity.
• The omnibus approval shall specify:

(i) name(s) of the related party, nature, and period of the transaction, and maximum value;

(ii) indicative base or current price and variation formula, if any; and

(iii) other conditions deemed fit by the Committee.

• Where prior details are unavailable, omnibus approval may be granted for transactions not exceeding ₹1 crore per transaction.
• The Audit Committee shall review quarterly the details of transactions approved under omnibus approvals.
• Omnibus approvals shall be valid for a maximum period of one year and require renewal thereafter.
• All material related party transactions and subsequent material modifications shall require prior approval of shareholders through a resolution. No related party shall vote to approve such resolutions, irrespective of whether the entity is a related party to that transaction.
  • Shareholder approval is not required for related party transactions of listed subsidiaries covered under Regulation 23 and 15(2). For unlisted subsidiaries of such listed subsidiaries, approval of the listed subsidiary’s shareholders shall suffice.
  • The requirements under this sub-regulation shall not apply to a resolution plan approved under Section 31 of the Insolvency and Bankruptcy Code, provided such approval is disclosed to the stock exchanges within one day.
• Sub-regulations (2), (3), and (4) shall not apply to:

(a) Transactions between two Government companies;

(b) Transactions between a holding company and its wholly-owned subsidiary whose accounts are consolidated and placed before shareholders;

(c) Transactions between two wholly-owned subsidiaries of a listed holding company whose accounts are consolidated and placed before shareholders.

For this purpose, “Government company” shall have the meaning assigned under Section 2(45) of the Companies Act, 2013.

• The provisions of this regulation shall apply prospectively.
• All existing material related party contracts or arrangements entered into prior to the notification of these regulations, which continue thereafter, shall be placed before shareholders for approval in the first general meeting following such notification.
• The listed entity shall disclose related party transactions to the stock exchanges in the format prescribed by SEBI and publish the same on its website.
  • A high value debt listed entity shall submit such disclosures along with its standalone financial results for the half year.
  • Disclosures shall be made every six months within fifteen days from publication of standalone and consolidated financial results.
  • With effect from April 1, 2023, such disclosures shall be made on the date of publication of the financial results.

Related Party Transaction in case of HVDLE (Regulation 62K)

1. Policy Requirement:
   • Every HVDLE shall formulate a policy on materiality of related party transactions (RPTs) and on dealing with such transactions.
   • The policy shall include clear threshold limits approved by the Board and must be reviewed and updated at least once every three years.
2. Definition of Material Transactions:
   • A transaction shall be considered material if, individually or with previous transactions during a financial year, it exceeds ₹1,000 crore or 10% of the annual consolidated turnover, whichever is lower.
   • Transactions involving brand usage or royalty shall be deemed material if they exceed 5% of the annual consolidated turnover.
3. Audit Committee Approval:
   • All RPTs and subsequent material modifications require prior approval of the Audit Committee of the HVDLE.
   • Only independent directors on the Audit Committee can approve RPTs.
4. Additional Audit Committee Provisions:
   • The Audit Committee shall define “material modifications” and disclose the same in the RPT policy.
   • Prior approval is required for RPTs of a subsidiary (where HVDLE is not a party) if the value exceeds:
     • 10% of the annual consolidated turnover (based on HVDLE’s last audited financials), or
     • 10% of the subsidiary’s annual standalone turnover (as per its last audited financials).
   • No approval is needed if the listed subsidiary itself is governed by Regulation 23 and Regulation 15(2).
   • For unlisted subsidiaries of listed subsidiaries, the Audit Committee of the listed subsidiary shall approve.
5. Omnibus Approval by Audit Committee:
   • The Audit Committee may grant omnibus approval for repetitive RPTs subject to:
     a) Criteria for granting such approval being in line with the RPT policy.
     b) Satisfaction that such approval is in the HVDLE’s interest.
     c) Specification of related party name, nature, duration, maximum value, price basis, and conditions.
     d) For unforeseen transactions, omnibus approval allowed up to ₹1 crore per transaction.
     e) Quarterly review of transactions entered into under omnibus approvals.
     f) Validity of omnibus approval limited to one year.
6. Approval from Debenture Trustee and Debenture Holders:
   • All material RPTs and material modifications require prior No-Objection Certificate (NOC) from the Debenture Trustee.
   • The Debenture Trustee must obtain No-Objection from non-related debenture holders holding at least 50% in value, through voting (including e-voting).
7. Shareholder Approval:
   • After obtaining NOC from the Debenture Trustee and debenture holders, shareholder approval through a resolution must be obtained.
   • If NOC is withheld, the matter shall not proceed to shareholder consideration.
8. Applicability of NOC Requirement:
   • The NOC procedure applies to listed debt securities issued on or after April 1, 2025.
   • For outstanding listed debt securities as on March 31, 2025, NOC is not required for existing or prospective RPTs.
   • NOC and shareholder approval are not required for RPTs of listed subsidiaries covered under Regulation 62K.
   • For unlisted subsidiaries of such listed subsidiaries, approval and NOC of the listed subsidiary shall suffice.
   • Exemption applies for resolution plans approved under Section 31 of the Insolvency and Bankruptcy Code, subject to disclosure to stock exchanges within one day.
9. Exemptions:
   The provisions of sub-regulations (3), (4), and (5) do not apply to:
   • Transactions between two Government companies.
   • Transactions between a holding company and its wholly-owned subsidiary whose accounts are consolidated and placed before shareholders.
   • Transactions between two wholly-owned subsidiaries of a listed holding company whose accounts are consolidated and placed before shareholders.
10. Applicability Date:
    • The provisions of this regulation apply to all transactions entered into on or after April 1, 2025.
11. Disclosure Requirement:
    • HVDLEs shall disclose RPTs to the stock exchanges in the SEBI-specified format and publish them on their websites.
    • Such disclosures shall be submitted along with standalone financial results for the half-year.