Question 1

Who is a "related party" under the Companies Act 2013?

Accepted Answer

Section 2(76) defines related party: directors and their relatives (Section 2(77)); KMP and their relatives; companies in which directors have ≥2% shareholding; companies that are subsidiaries, associates, or holding companies; firms where directors or their relatives are partners; trusts where directors are trustees. Listed company definition under SEBI LODR is broader and includes persons acting in concert.

Question 2

What RPTs require Board and shareholder approval for a private company?

Accepted Answer

Section 188 requires prior Board approval (Special resolution for public companies; ordinary resolution sufficient for private) for contracts involving: sale/purchase/supply of goods/materials; selling/buying property; underwriting; services; appointment of agent, attorney, or office of profit. Omnibus approval by Audit Committee is available for listed companies — not automatically for private companies.

Question 3

What is the consequence of an RPT done without required approval?

Accepted Answer

Section 188(5): contracts entered into without required approval are voidable at the option of the Board or shareholders. Directors who authorised the unauthorised RPT are jointly and severally liable for losses. Section 166(4) additionally holds directors liable for breach of duty where personal interest conflicts with company interest. Prosecution under Section 188(6): fine ₹25,000–₹5 lakh on each officer in default.

Question 4

What is the disclosure requirement for RPTs in financial statements?

Accepted Answer

AS 18 / Ind AS 24 require disclosure of all RPTs even if at arm's length: nature of relationship, nature and value of transaction, outstanding balances, and pricing basis. Listed companies additionally must file half-yearly RPT disclosures with stock exchanges under SEBI LODR Regulation 23(9) within 15 days of half-year end — even for non-material transactions.

Question 5

What is arm's-length pricing and how is it documented?

Accepted Answer

An RPT is at arm's length if it is transacted on terms that a party would accept with an unrelated party in comparable circumstances. Documentation: market quotes, rate card from unrelated parties for same service/goods, third-party appraisals for property. The Board resolution approving the RPT should record the basis for concluding arm's-length pricing. For income tax, Section 40A(2) disallows the excess payment above FMV to a related party.

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