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What is a Related Party in a Company ?

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What is a Related Party in a Company ?

What is a Related Party in a Company? Every transaction must be conducted at an arm's length distance. When it comes to other transactions that are related party ones then they must be recognized and disclosed separately.

Companies Act, 2013 and Accounting Standards and Standards on Auditing issued by Institute of Chartered Accountants of India (ICAI) require management to provide a separate disclosure for all related party transactions.

The Act has widened the scope of related party transactions and has also included immovable property transactions in it. It also requires way too many disclosures.

Related party transactions are covered under Section 188 of Companies Act, 2013 which is read along with Rule 5 of Companies (Meetings of Board and its powers) Rules, 2014.

What is a related party?

As per Section 2(76) of Companies Act, 2013 a related party is:

  • Director, key managerial person (KMP) and their relatives
  • A firm in which director, manager or their relatives are a partner
  • A private limited company in which director or manager is a director or member
  • A public company in which director or manager is a director or he holds more than 2% of its paid-up share capital

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  • A person whose advice on which director or manager acts
  • Body corporate in which director or manager exercises substantial influence
  • Holding company of the company
  • Subsidiary of the company
  • Director or KMP of the holding company.

What are related party transactions?

Related party transactions are those transactions which do not happen at an arm's length. The transactions are not consistent with the regular ones and have discrepancies.

For instance, selling of goods at a price less than market value, lessing of any kind of property, appointment if place or office of profit in a company, its subsidiary or associate company, selling or availing of any kind of services at any rate etc.

To go ahead with the related party transactions the company needs to seek prior approval of its Board of Directors and members of the company every time such a transaction is entered into.

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