Definition of Related Parties

• Related parties include the holding company, fellow subsidiaries, key managerial personnel, directors, and their relatives.
  
• Any entity in which a director or key manager holds significant influence is also considered related.
  
• The definition is outlined in Section 2(76) of the Companies Act, 2013.
  
• Transactions with such entities are classified as Related Party Transactions (RPTs).
  
• RPTs can involve sales, purchases, leases, services, or financial arrangements.
  

Approval Requirements under Companies Act

• Board approval is mandatory for all RPTs regardless of value.
  
• If the transaction exceeds prescribed thresholds, prior shareholder approval by special resolution is required.
  
• Interested directors cannot vote on such resolutions at board or shareholder meetings.
  
• Thresholds vary by type of transaction and are based on turnover or net worth of the subsidiary.
  
• Form MGT-14 must be filed if shareholder approval is obtained for such transactions.
  

Exemptions and Special Cases

• Transactions between a wholly owned subsidiary and its holding company are exempt from shareholder approval if disclosed in the board report.
  
• Transactions in the ordinary course of business and at arm’s length price may not need shareholder approval.
  
• For listed subsidiaries, SEBI’s LODR Regulations require audit committee approval for all material RPTs.
  
• Material RPTs are those exceeding ₹1000 crore or 10% of annual consolidated turnover, whichever is lower.
  
• Approval from independent directors is mandatory in such cases.
  

Disclosure and Reporting Obligations

• All RPTs must be disclosed in the Board’s Report in Form AOC-2.
  
• Details of RPTs are reported in the financial statements under Schedule III.
  
• Listed subsidiaries must submit a half-yearly RPT disclosure to the stock exchange.
  
• Disclosures must include transaction details, value, nature, and relationship of the parties.
  
• Adequate justification and documentation are required to prove arm’s length pricing.
  

Transfer Pricing and Tax Implications

• RPTs with foreign related parties must comply with Transfer Pricing regulations under the Income Tax Act.
  
• Form 3CEB certified by a Chartered Accountant must be filed for specified domestic or international transactions.
  
• Transactions must be supported with benchmarking studies to prove arm’s length nature.
  
• Non-compliance may lead to tax adjustments, penalties, and interest liabilities.
  
• Advance Pricing Agreements (APAs) can be used to fix pricing for repeated RPTs.