Related party refers to existence special relationship between body corporate and other party prior to corporate own transaction. Thus these relationships are no way related to company’s own transactions. Related party has been defined under Company Act, 2013 under section 2(76), which defines related party in reference to Directors or Key Managerial Person and their relative, and firms & company in which are partners, and firms which they are directors with more than 2% share capital. The definition proposed here is not exhaustive in nature, but only illustrative. Further these provisions apply to all company i.e. private and public alike.[1]
Related Party Transactions are Allowed
S 188 of the Act governs the conditions regulating how Related Party transactions are to be entered into, i.e. by disclosure and ratification of the same before and by the Board of Director and Shareholders. Thus these transactions have been allowed by the Act, and are not banned per se.
All the transactions falling within the purview of S 188 need to be disclosed in Board Report along with justification for the transaction, for the purpose of approval. Further if certain thresholds are crossed these can only be approved by special resolution in General Meeting. These thresholds can be broadly transaction involving more 10% or 100 crore of sale/purchase/supply, of goods or services/ property, and appointment of related party to office of profit in the company or subsidiary.
In the proceedings dealing with related party transactions, such related party are required to abstain from voting in the same. Once the requirements under this provisions are satisfied RTP can be proceeded with.
Arms Length Transaction
It can be seen as exception to Related Party Transaction rule, thus if the transaction which is under scrutiny is conducted in Justifiable and fair manners. Thus if a transactions can be said to be free from any bias that may crop in due relations between party, they can be exempted from compliance in this section.[2]
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[1] Vikrant Rana and Rupin Chopra, A Brief Overview Of Related Party Transactions, Mondaq, 26 July 2017, http://www.mondaq.com/india/x/614332/Contract+Law/A+Brief+Overview+Of+Related+Party+Transactions (last viewed Oct 18, 2018)
[2] Related party transactions, Companies Act 2013, Ernst & Young Global Limited, https://www.ey.com/in/en/issues/governance-and-reporting/ey-compass-on-companies-act-2013/ey-cfo-companies-act-2013-related-party-transactions (last viewed Oct 19, 2018).