Approval process for Related Party Transactions

Approval Process for Related Party Transactions

Related Party Transaction approval process under Companies Act, 2013, Rules thereon and SEBI (Listing Obligations and Disclosure Requirements), 2015 for Listed and Unlisted Public Companies and Private Companies.

Flow chart credit: http://www.ey.com/IN/en/Issues/Governance-and-reporting/EY-Compass-on-Companies-Act-2013/EY-cfo-companies-act-2013-related-party-transactions  

Listed Company

Ø  Applicable Provisions

§  Section 188 of the Companies Act, 2013, as amended

§  Companies (Meetings of Board and its Powers) Rules, 2014, as amended

§  SEBI (Listing and Disclosure Requirements) Regulations, 2015 (Listing Regulations, 2015)

Ø  Regulation 2(zc) of the Listing Regulations,2015 defines Related Party Transactions (“RPTs”) as a transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged.

Ø  All RPTs of Listed Companies require prior approval of the Audit Committee. 

Ø  RPTs exceeding 10% of annual turnover as per the last audited accounts would require shareholders’ approval through Special Resolution.

Ø  The related parties shall abstain from voting on such resolutions.

Unlisted Public Company / Private Company

Ø  Applicable Provisions

§  Section 188 of the Companies Act, 2013, as amended

§  Companies (Meetings of Board and its Powers) Rules, 2014, as amended

Ø  RPTs other than those entered into by the company other than in its ordinary course of business or which are not on an arm’s length basis require approval of the Board. 

Ø  RPTs exceeding threshold limits provided under Rule 15(3) would require prior approval of the shareholders’ through Ordinary Resolution.

Ø  The related parties shall abstain from voting on such resolutions, except in case of private companies.

Ø  The Turnover or Net Worth shall be on the basis of the Audited Financial Statement of the preceding financial year.

Materiality threshold for Unlisted Public Company / Private Company

Transactions	Materiality threshold
Sale, purchase or supply of any goods or materials	> 25% of turnover
selling or otherwise disposing of, or buying, property of any kind	>10% of net worth
leasing of property of any kind	>10% of net worth or 25% of turnover
availing or rendering of any services	>10% of net worth
appointment to any office or place of profit in the company, its subsidiary company or associate company	monthly remuneration > Rs.2.5 lacs
underwriting the subscription of any securities or derivatives thereof, of the company	remuneration > 1% of net worth
appointment of any agent for purchase or sale of goods, materials, services or property	No materiality threshold prescribed

Transactions between Holding Company and Wholly owned subsidiary exempted from the requirement of Section 188