Introduction
Related Party Transactions (RPTs) are transactions that a company undertakes with parties related to it, such as directors, key managerial personnel, or entities controlled by them. These transactions can have significant implications for a company’s financial health and governance practices. The Companies Act, 2013, along with relevant accounting standards, provides a framework for managing RPTs to ensure transparency and protect stakeholder interests. This detailed guide explores the concept of RPTs, their legal provisions, compliance requirements, and their impact on corporate governance.
Definition of Related Party Transactions
Under the Companies Act, 2013, a Related Party Transaction is defined as a transaction between a company and a related party that involves the transfer of resources, services, or obligations. Related parties include:
- Directors and their relatives
- Key managerial personnel (KMP) and their relatives
- Holding, subsidiary, and associate companies
- Any firm, private company, or public company in which the directors or KMP are members or directors
- Any entity that the company has control or significant influence over
Legal Provisions Under the Companies Act, 2013
The Companies Act, 2013, outlines specific provisions to regulate RPTs, ensuring that these transactions are conducted transparently and fairly. Key sections include:
Section 188: Approval and Disclosure
Section 188 of the Companies Act, 2013, mandates that RPTs require approval from the Board of Directors and, in certain cases, the shareholders. Key provisions include:
- Board Approval: All RPTs must be approved by a resolution of the Board of Directors.
- Shareholders’ Approval: Transactions exceeding prescribed thresholds require prior approval from shareholders through an ordinary resolution.
- Interested Directors: Directors interested in the RPT must abstain from voting on the resolution approving the transaction.
- Disclosure in Financial Statements: The company must disclose details of RPTs in its financial statements and board reports.
Rule 15: Companies (Meetings of Board and its Powers) Rules, 2014
Rule 15 specifies the thresholds for transactions that require shareholders’ approval, including:
- Sale, purchase, or supply of goods or materials exceeding 10% of the turnover or INR 100 crore, whichever is lower.
- Selling or otherwise disposing of, or buying property exceeding 10% of net worth or INR 100 crore, whichever is lower.
- Leasing property exceeding 10% of net worth or 10% of turnover or INR 100 crore, whichever is lower.
- Availing or rendering services exceeding 10% of turnover or INR 50 crore, whichever is lower.
Compliance Requirements
To ensure compliance with legal provisions, companies must adhere to several key requirements:
1. Board Approval
The Board of Directors must review and approve all RPTs. The agenda for the board meeting should include all relevant details of the transactions, such as the nature, terms, and value.
2. Shareholders’ Approval
If an RPT exceeds the specified thresholds, it must be approved by the shareholders. The notice for the general meeting should provide detailed information about the transaction, including the rationale and benefits.
3. Disclosure in Financial Statements
Companies must disclose RPTs in their financial statements, including the nature, value, and parties involved. This ensures transparency and allows stakeholders to assess the impact of these transactions.
4. Maintenance of Registers
Companies must maintain registers of contracts or arrangements with related parties in Form MBP-4, and these registers should be placed before the Board and signed by all directors present.
Implications of Related Party Transactions
RPTs can have significant implications for a company’s governance and financial health:
1. Impact on Financial Statements
RPTs can affect the company’s financial performance and position. Proper disclosure ensures that the financial statements reflect a true and fair view.
2. Corporate Governance
Transparent handling of RPTs promotes good corporate governance. It helps in building trust among stakeholders and reduces the risk of conflicts of interest and fraudulent practices.
3. Legal and Regulatory Compliance
Non-compliance with RPT regulations can lead to penalties, legal action, and reputational damage. Ensuring compliance helps in mitigating these risks.
4. Shareholder Confidence
Proper management and disclosure of RPTs enhance shareholder confidence. It assures shareholders that their interests are protected and the company is managed ethically.
Best Practices for Managing RPTs
Companies can adopt best practices to effectively manage RPTs:
- Establish Clear Policies: Develop and implement clear policies for identifying, reviewing, and approving RPTs.
- Regular Monitoring: Monitor RPTs regularly to ensure compliance with legal provisions and internal policies.
- Independent Review: Engage independent directors or committees to review and oversee RPTs to avoid conflicts of interest.
- Training and Awareness: Conduct regular training sessions for directors and key personnel on the legal requirements and implications of RPTs.
- Transparent Disclosure: Ensure transparent and detailed disclosure of RPTs in financial statements and board reports.
Conclusion
Related Party Transactions (RPTs) are an integral aspect of corporate operations but require careful management to ensure transparency, fairness, and compliance with legal provisions. By understanding the regulatory framework, adhering to compliance requirements, and adopting best practices, companies can effectively manage RPTs, safeguard stakeholder interests, and promote good corporate governance. Regular review and monitoring of RPTs are crucial to maintaining ethical standards and achieving long-term business success.
