Discuss Related Party Transactions

[Parveen Komal]

Related party transactions (RPTs) in India are governed under several frameworks, including the Companies Act, 2013, the Securities and Exchange Board of India (SEBI) regulations (especially under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, commonly referred to as LODR Regulations), and individual company policies that may further tighten these requirements. Companies Act, 2013:


Under the Companies Act, 2013, certain types of RPTs require prior approval of the Board of Directors and, in some cases, the shareholders. The Act details the requirements for RPTs in Section 188. Generally, for public and private companies:

• Board Approval: RPTs covered under Section 188 need prior approval of the Board of Directors through a resolution at a meeting of the Board. The interested parties cannot vote on this resolution.
• Shareholder Approval: If the transaction exceeds certain prescribed thresholds (based on the company's annual turnover, net worth, or as specified), it requires approval through a special resolution in a general meeting of the shareholders. Again, related parties cannot vote on such resolutions.

SEBI (LODR) Regulations, 2015:


The SEBI (LODR) Regulations provide a comprehensive framework for RPTs for listed entities, aiming to ensure transparency and protect the interests of minority shareholders.

• Audit Committee Approval: As per Regulation 23, all RPTs, irrespective of their value, need prior approval of the Audit Committee. The Audit Committee may grant omnibus approval for RPTs, subject to certain conditions and value limits.
• Shareholder Approval: Certain RPTs, if they exceed prescribed thresholds (specified in terms of percentage of annual consolidated turnover as per the last audited financial statements of the listed entity), require prior approval of the shareholders through a resolution, and no related party shall vote to approve such resolutions, whether the entity is a related party to the particular transaction or not.

Specific Considerations:

• Material RPTs: The thresholds for what constitutes a "material" transaction can vary under the Companies Act and SEBI LODR. SEBI's LODR specifies certain thresholds beyond which RPTs are considered material and require shareholder approval.
• Who Grants Approval: The Board of Directors, Audit Committee, and Shareholders (through special resolutions) are the bodies/entities that grant approvals for RPTs, depending on the specifics of the transaction and the governing law/regulation.

For all RPTs, disclosure requirements must be met as per the specific regulations. Companies must also ensure compliance with additional SEBI circulars and guidelines that may impact RPT governance and disclosure.

It's critical for companies, directors, and stakeholders to stay informed about the latest amendments and guidelines issued by SEBI and the Ministry of Corporate Affairs (MCA) in India, as these regulations are subject to change and updates.

[SwatiSood]

Related party transactions refer to business deals or arrangements between two parties who have a pre-existing relationship. These relationships could be based on family ties, shared ownership, common management, or other connections that may influence the terms of the transaction. Related party transactions are common in various sectors including corporate, governmental, and non-profit organizations.

Here are some key aspects and considerations regarding related party transactions:

1. Types of Related Parties: Related parties can include individuals, entities, or other organizations with a close relationship to the primary entity. This could involve affiliates, subsidiaries, shareholders, directors, key management personnel, and their family members.
2. Types of Transactions: Related party transactions can take various forms, such as the sale or purchase of goods, rendering of services, lending or borrowing of money, leasing of property, or the transfer of intellectual property rights.
3. Regulatory Requirements: Many regulatory bodies require companies to disclose related party transactions in their financial statements. These disclosures are aimed at ensuring transparency and preventing potential conflicts of interest. Depending on the jurisdiction and the nature of the transaction, specific rules and regulations may apply.
4. Fair Value and Arm's Length Principle: Related party transactions should ideally be conducted at fair value, reflecting the price that would be agreed upon by unrelated parties in an arm's length transaction. Ensuring fairness is crucial to prevent one party from gaining undue advantage at the expense of the other.
5. Disclosure Requirements: Companies typically have to disclose details of related party transactions in their financial statements. This disclosure includes the nature of the relationship, a description of the transaction, the volume of the transaction, any outstanding balances, and any other significant terms and conditions.
6. Potential Risks and Challenges: Related party transactions can pose risks such as conflicts of interest, self-dealing, and unfair advantage to one party over the other. Such transactions might not always be in the best interest of the company or its shareholders. Therefore, it's essential for companies to have robust internal controls and governance mechanisms in place to monitor and mitigate these risks.
7. Corporate Governance and Oversight: Strong corporate governance practices are essential for overseeing related party transactions. This includes having independent directors on the board, establishing audit committees, conducting regular reviews and approvals of related party transactions, and maintaining clear policies and procedures governing such transactions.
8. Legal and Ethical Considerations: Companies must ensure that related party transactions comply with all applicable laws and regulations. Moreover, they should adhere to ethical standards and principles of fairness and transparency to maintain trust with stakeholders.

[harpreetkaur]

Related party transactions (RPTs) refer to the financial dealings between parties with a close relationship. These relationships could include individuals or organizations who are directly or indirectly associated with each other, such as parent companies, subsidiaries, affiliates, key management personnel, and their close family members.

Here are some key points to discuss related party transactions:

1. Types of Related Parties: Related parties can include parent companies, subsidiaries, affiliates, joint ventures, key management personnel, and their close family members.
2. Nature of Transactions: RPTs can involve various financial transactions such as the sale or purchase of goods, services, loans, transfers of assets, leases, guarantees, and other financial commitments.
3. Risks and Concerns: RPTs can present risks to the integrity of financial reporting and corporate governance. There is a potential for conflicts of interest, as one party may prioritize its interests over the other party. These transactions may not be conducted at arm's length, meaning the terms of the transaction may not be fair and competitive.
4. Regulatory Requirements: Many jurisdictions have specific regulations and accounting standards that require disclosure and sometimes approval of related party transactions. For example, the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) often mandate disclosure of related party transactions in financial statements.
5. Disclosure Requirements: Companies are typically required to disclose related party transactions in their financial statements, including the nature of the relationship, the volume of transactions, any outstanding balances, and any terms and conditions of the transactions.
6. Fair Value Assessment: In cases where related party transactions occur, it may be necessary to assess whether the terms of the transactions are at arm's length and whether they represent fair value. Independent valuations or market benchmarks may be used for this purpose.
7. Corporate Governance: Strong corporate governance practices are essential for managing related party transactions effectively. This may involve establishing clear policies and procedures for identifying, approving, and disclosing related party transactions, as well as ensuring that conflicts of interest are appropriately managed.
8. Auditor Scrutiny: Auditors pay close attention to related party transactions during their audit procedures to assess the accuracy and completeness of financial reporting. They may perform additional procedures to verify the legitimacy and fairness of these transactions.

Overall, related party transactions can pose significant risks to the integrity and transparency of financial reporting, making it essential for companies to implement robust policies and procedures to identify, monitor, and disclose such transactions effectively. Transparent disclosure and adherence to regulatory requirements are crucial for maintaining investor confidence and trust in the company's financial statements.

[harsh]

Related party transactions (RPTs) refer to exchanges of goods, services, or financial arrangements that occur between entities with a pre-existing relationship. These relationships could involve companies under common ownership, management, or control, as well as individuals or entities closely associated with the business, such as key management personnel, their families, or other entities they have significant influence over. Understanding the dynamics of related party transactions is crucial for ensuring transparency, fairness, and accountability in business dealings.

1. Types of Related Party Transactions: RPTs encompass a wide range of transactions, including the sale or purchase of goods, provision of services, loans or other financial arrangements, leases, and transfers of assets. These transactions can occur at market prices, negotiated terms, or even on a non-arm's length basis, where the terms may not be as favorable as those available in an open market.

2. Key Issues and Concerns: One of the primary concerns associated with RPTs is the potential for conflicts of interest. When transactions occur between entities with close relationships, there's a risk that one party may prioritize its interests over those of the other, leading to unfair advantages or unfavorable terms. This could result in financial losses for shareholders, erosion of trust, and reputational damage for the entities involved.

3. Regulatory Framework and Compliance: Regulatory bodies and accounting standards, such as the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), provide guidelines for disclosing and accounting for related party transactions. Companies are typically required to disclose the nature, terms, and significance of RPTs in their financial statements, along with any potential risks or conflicts of interest involved.

4. Mitigating Risks and Ensuring Transparency

To mitigate the risks associated with RPTs and ensure transparency and fairness, companies employ various measure

• Independent Review: Engaging independent auditors or third-party experts to review related party transactions can provide an objective assessment of their fairness, appropriateness, and compliance with regulatory requirements.
• Disclosure and Transparency: Companies must disclose all material related party transactions in their financial statements, including the nature of the transactions, the parties involved, and the terms and conditions. Enhanced transparency helps stakeholders, including investors, regulators, and creditors, assess the potential impact of RPTs on the company's financial position and performance.
• Approval Processes: Implementing robust approval processes and oversight mechanisms for related party transactions can help ensure that such transactions are conducted in the best interests of the company and its stakeholders. This may involve establishing special committees or boards to review and approve RPTs, particularly those involving significant value or potential conflicts of interest.
• Fair Market Value Assessment: Conducting periodic assessments to determine the fair market value of goods, services, or assets involved in related party transactions can help mitigate the risk of undervaluation or overvaluation, ensuring that transactions are conducted at arm's length terms.