Related Party Transactions

Meaning of Related Party1:

For the purpose of the preparation and presentation of financial statements the following
parties are considered as related parties.
a) Managers
b) Directors and their relatives, A firm is which a director/his relative is a partner or a
Private Limited Co. in which a director is a member.
c) Companies under the same management
d) Subsidiaries
e) Relatives as provided in section 6 of the Act :
1. Members of the HUF.
2. Spouse
3. Brother and Brother's wife
4. Sister and sister's husband
5. Father and mother
6. Son and son's wife
7. Daughter and daughter's husband
8. Paternal and maternal grandfathers and grandmother and
9. Grand children and their spouses

Undesirable Corporate Practices Related to Related Party Transactions:

Purchase of goods or services from a related party at little or no cost or at inflated

prices to the entity.

Payments for services never rendered or at inflated prices.

Companies Act, 1956

Sales at below market rates to an unnecessary "middle man" related party, who in turn
sells to the ultimate customer at a higher price with the related party (and ultimately
its principals) retaining the difference.

Purchases of assets at prices in excess of fair market value.

Use of trade names or patent rights at exorbitant rates even after their expiry or at a
price much higher than the price, which cannot be described as reasonable.

Borrowing or lending on an interest-free basis or at a rate of interest significantly

above or below market rates prevailing at the time of the transaction.

Exchanging property for similar property in a non-monetary transaction.

Selling real estate at a price that differs significantly from its appraised value.

Accruing interest at above market rates on loans.

Compliance:
1. Every profit and loss account and balance sheet of a company shall comply with the
Accounting Standards. As per the provision of section 211(7), if any person as is
referred to in sub-section (6) of section 209 fails to take all reasonable steps to secure
compliance by the company, as respects any accounts laid before the company in
general meeting, with the provisions of this section and with the other requirements of
this Act as to the matters to be stated in the accounts, he shall, in respect of each
offence, be punishable with imprisonment for a term which may extend to six months,
or with fine which may extend to ten thousand rupees, or with both2.
2. No company (hereinafter in this section referred to as "the lending company")
[without obtaining the previous approval of the central Government in that behalf
shall, directly or indirectly,] make any loan to, or give any guarantee or provide any
security in connection with a loan made by any other person to, or to any other person
by3, a) Any director of the lending company or of a company which is its
holding company or any partner or relative of any such director;
b) Any firm in which any such director or relative is a partner;

Section 211(3A) of Indian Companies Act, 1956

Section 295 (1) of Indian Companies Act, 1956

c) Any private company of which any such director is a director or

member;
d) Anybody corporate at a general meeting of which not less than twentyfive per cent of the total voting power may be exercised or controlled
by any such 9director, or by two or more such directors together, or
e) Anybody corporate, the Board of directors, managing director, or
manager where of is accustomed to act in accordance with the
directions or instructions of the Board, or of any director or directors,
of the lending company.
3. The above shall not apply to4 a) Any loan made, guarantee given or security provided 1. By a private company unless it is a subsidiary of a public
company, or
2. By a banking company;
b) Any loan made by a holding company to its subsidiary company;
c) Any guarantee given or security provided by a holding company in
respect of any loan made to its subsidiary company.
4. The Boards approval is mandatory for the sale, purchase, or supply of any goods,
material or services where in directors are interested directly or indirectly5.
5. Every director is required to disclose to the Board about the nature of his concern or
interest in a contract or any arrangement6.
6. A general notice given to the Board by a director to the effect that he is a director or a
member of a specified body corporate or is a member of a specified firm and is to be
regarded as concerned or interested in any contract or arrangement which may, after
the date of notice, be entered into with that body corporate or firm, shall be deemed to
be a sufficient disclosure of concern or interest in relation to any contract or
4

Section 295 (2) of Indian Companies Act, 1956

Section 297 of Indian Companies Act, 1956
6
Section 299 of Indian Companies Act, 1956
5

arrangement so made. Such general notice shall expire at the end of the financial year.
By giving a fresh notice it can be renewed for further periods of one financial year.
This notice is given in Form No. 24AA7.
7. An interested director will not be permitted to participate in discussion or vote. His
presence will not count for the purpose of forming a quorum. But a purely
independent private limited company is exempted from these provisions8.
8. Every company shall keep one or more registers and enter the following particulars :
a) The date of the contract or arrangement.
b) The names of the parties thereto.
c) The principal terms and conditions thereof.
d) In the case of contract falling under section 299, the date on which it
was placed before the Board.
e) The names of directors voted for and against the contract or
arrangement and the names of those remaining neutral.
9. Except with the consent of the company accorded by a special resolution,
a) no director of a company shall hold any office or place of profit, and
b) no partner or relative of such director, no firm in which such director,
or a relative of such director, is a partner, no private company of which
such director is a director, is a partner, no private company of which
such director is a director or member, and no director or manager of
such a private company, shall hold any office or place of profit
carrying a total monthly remuneration of (such sum as may be
prescribed, presently Rs.20000)

7
8

Section 299(3)(a) of Indian Companies Act, 1956

Section 300 of Indian Companies Act, 1956

Directors duty to disclose interest:

1. The Law should impose a duty on every director to disclose to the company, the
contracts or arrangements with the company, whether existing or proposed or
acquired subsequently, in which he, directly or indirectly, has any interest or concern.
2. The manner, time limit and the extent of such disclosure should be specified in the
Act. The notice for relevant disclosure should be made by the interested director to
the Board of Directors at a meeting of the Board in which the transaction is to be
discussed, so that information is available to the Board in a timely manner. The
provisions in the existing Law to issue general notice by the directors in respect of
their interest in contracts/arrangements by the company should continue.
3. Failure to make disclosure should be treated as a default. Director concerned should
be held liable to penalties and he should be deemed to have vacated his office. This
should also be a condition of disqualification to hold office of director of that
company for a prescribed period.
4. Directors Responsibility Statement should include an additional clause to the effect
that every director has made relevant disclosures as mentioned above.
5. Interested director should abstain from participating in the Board meeting during
consideration of relevant agenda item in which he is interested.
6. The company should maintain a register, in which all transactions above a prescribed
threshold value in respect of contracts/arrangements, in which directors are interested,
should be entered. The register should be kept at registered office of the company and
should be open to inspection to all members.