Legal - Kiran Rai.pdf

ESSENTIAL ELEMENTS
OF
A VALID CONTRACT
By :-
Mohammad Iqbal Dar
Assistant Professor Commerce
Government Degree College Kulgam.

According to sec 2(h) of Indian Contract Act 1872 the
Contract is an agreement enforceable at law.
An agreement, to be enforceable at law, must posses
the essential elements of a valid contract as contained
in section 10 of the Indian Contract Act 1872.
Only that agreements which are enforceable by law
are contracts.
All Contracts are agreements but all agreements are
not contracts.
Agreement =Offer+Acceptance
Contract = Agreement + Enforceability at law.

ESSENTIAL ELEMENTS OF A VALID
CONTRACT
1.Offer and Acceptance.
In order to create a valid contract, there must be a
'lawful offer' by one party and 'lawful acceptance' of the
same by the other party.
Section 2 (a) of the Contract Act defines Offer as –
‘when one person signifies to another his willingness to
do or to abstain from doing anything, with a view to
obtaining the assent of that other to such act or
abstinence, he is said to make an offer'. Section 2 (b) of
the Contract Act states that, ‘when the person to whom
the offer is made signifies his assent there to, the offer
is said to be accepted.

2 Intention to Create Legal
Relationship.
In case, there is no such intention on the part of parties, there is
no contract. Agreements of social or domestic nature do not
contemplate legal relations. Case :- Balfour vs. Balfour(1919)
Mr. Balfour and his wife went to England for a vacation, and his
wife became ill and needed medical attention. They made an
agreement that Mrs. Balfour was to remain behind in England
when the husband returned to Ceylon (Sri Lanka) and that Mr.
Balfour would pay her £30 a month until she returned. This
understanding was made while their relationship was fine;
however the relationship later soured. The lower court found that
there was sufficient consideration in the consent of Mrs. Balfour
and thus found the contract binding, which Mr. Balfour appealed.
Arrangements made between husbands and wives are not
generally contracts as the parties do not intend to be legally
bound by the agreements.

3.Lawful Consideration.
At the desire of promisor, promisee or any other person has
done or abstain from doing or does abstain from doing such
act or promises is known as consideration. According to
Blackstone "Consideration is recompense given by the party
contracting to another." In other words of Pollock,
"Consideration is the price for which the promise of the
another is brought." Consideration is known as “quid pro-
quo” or something in return. It may be cash, kind, act or
abstinence and may be in past, present or future. It should
not be unlawful, immoral and against the public policy.

4. Competency of The
parties./Capacity to contract.
The parties to an agreement must be
competent. If either of the parties does not have
the ability to contract, the contract is not valid. The
following persons are incompetent to contract. (a)
Minor: A person less than age of 18 is minor.
Case-Mohri Bibi vs Damodar Ghosh 1903 (b)
Unsound mind person: Any person who is unable
to understand the term and condition of contract at
the time of its formation is unsound mind. (c)
persons disqualified by law to which they are
subject.

5. Free Consent.
“Consent' means the parties must have
agreed upon the same thing in the same sense.
According to Section 14, Consent is said to be
free when it is not caused by- (1) Coercion
(Case- Rangnaykamma vs Alwar Setti 1889.)
(2) Undue Influence (3) Fraud (4) Mis-
representation (5) Mistake. An agreement should
be made by the free consent of the parties.

6. Lawful Object.
The object of an agreement must be valid.
Object has nothing to do with consideration. It means
the purpose or design of the contract. Thus, when
one hires a house for use as a gambling house, the
object of the contract is to run a gambling house. The
Object is said to be unlawful if- (a) it is forbidden by
law; (b) it is of such nature that if permitted it would
defeat the provision of any law; (c) it is fraudulent; (d)
it involves an injury to the person or property of any
other; (e) the court regards it as immoral or opposed
to public policy. Or any agreement to distribute the
money earned by robbery.

7. Certainty of Meaning.
According to Section 29,"Agreement the meaning of which is not
Certain or capable of being made certain are void.“ For e.g. : A agree
to sell to B a 100 tones of oil, there is nothing to show what kind of oil
intended, the agreement is void due to the absence of certainty. But if
A is dealer of coconut oil only agree to sell B,100 tones of oil, the
nature of A’s trade is sufficient to show the kind of oil, and this will be a
valid contract.
8. Possibility of Performance.
Condition for a contract should be capable for performance .If the act
is impossible in itself, physically or legally, if cannot be enforced at law.
For example: If A and B makes an agreement that if B encloses a
space with the help of two straight lines then A will pay him Rs. 1000
otherwise B will be liable for paying Rs. 500 to A. RESULT: This is an
impossible work. Two straight lines can not enclose a space , hence
contract is not valid.

9. Not Declared to be void or Illegal.
The agreement though satisfying all the conditions for a valid
contract must not have been expressly declared void by any law
in force in the country. Agreements mentioned in Section 24 to 30
of the Act have been expressly declared to be void. For example
agreements in restraint of trade, marriage, legal proceedings etc.
That is : If A is not willing to marry with B, law can not enforce
him/her.
10. Legal Formalities.
An oral Contract is a perfectly valid contract, expect in those
cases where writing, registration etc. is required by some statute.
In India writing is required in cases of sale, mortgage, lease and
gift of immovable property, negotiable instruments; memorandum
and articles of association of a company, etc. Registration is
required in cases of documents coming within the scope of
section 17 of the Registration Act 1908. All the elements
mentioned above must be in order to make a valid contract. If any
one of them is absent the agreement does not become a
contract.

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 Company Law Articles
Overview of Related Party and Related Party Transaction
 Alok Kumar Ghosh | Company Law
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 16 Jul 2022  15,126 Views  0 comment
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Related Party and Related Party
Transaction
In India statistics indicate that
maximum of total enterprises are
family-controlled businesses which
contribute to substantial portion of
the total employment. Unlike
transactions with third parties , the
distinguishing factor of an Related
Party Transaction is the special
relationship between the parties
transacting, which if misused , can
lead to serious consequences. The
instances of Related Party
transactions (RPTs) can cause
actual or potential conflict of interest
between the company and its
shareholders.
In this article an overview is given how and what have been clarified about
related party and related party transaction by different government bodies and
act.
Related Party:-
A “related party” is a person or an entity that is related to the reporting authority
. The person includes a legal person who can be individuals, company, firm,
LLP, Co-operative society, local authority. It also includes entities incorporated
outside India.
Before we discuss related party and Related Party Transaction we would come
across few terminologies which needs to be clarified.
Arm’s Length Basis:
“Arm’s Length” is an expression which is commonly used to refer to transactions
in which two or more unrelated and unaffiliated parties agree to do business ,
acting independently and in their self-interest.
Arm’s length price is a price at which a willing buyer and a willing unrelated
seller would freely agree to transact or a trade between related parties that is
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conducted as if they were unrelated, so that there is no conflict of interest in the
transaction.
A company named XYZ,UK entered into a contract with its subsidiary company
ABC, USA, for the purchase of raw material. The price per kg of raw material
was decided for 10 pound. Had XYZ,UK purchased the raw material from other
vendors supplying the same raw material located in the USA, they would have
got the raw material at a price of 7 pound per kg.
Here, XYZ, UK has tried to increase its expenses by purchasing from a related
party at a higher price (10 pound) than the fair price (7 pound). By doing so, it
has attempted to shift its profits to its related party located in the USA. Clearly,
the motive is to save taxes in the UK and shift the profits to USA.
The transaction between XYZ,UK and ABC USA is not at arm’s length. Had the
price agreed between them would have been within a reasonable range of 7
pound, then it would have been at arm’s length.
As per section 188 of Companies Act,2013 arm’s length price transaction
means a transaction between two related parties that is conducted as if they
were unrelated , so that no conflict of interest.
As per section 92F define Arm’s length price is the price applied or proposed to
be applied , when two unrelated persons enter into a transaction is uncontrolled
conditions.
Unrelated person- As per section 92A , the persons said to be unrelated if they
are not associated or deemed to be associated enterprise.
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Uncontrolled conditions are that conditions which are not controlled or
suppressed or moulded for achievement of a predetermined results.
Where an assessee has entered into various types of international transactions
with associate enterprise , arm’s length should be determined on a transaction
by transaction basis not on an aggregate basis.
Underwriting the subscription:
With subscription , the purchaser of the financial product applies to acquire
them directly from the issuer . With underwriting , a financial company e,g, bank
assumes the risk and commitment of reselling the total issue of the product to
individual investor. The types of underwriting are a) loan underwriting b)
insurance underwriting c) securities underwriting.
Any office or place of profit in Company:
Office or place of profit means any office or place where such office or place is
held by a director receives from X company anything by way of remuneration
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over and above the remuneration to which he is entitled as director by way of
salary, fee, commission, perks, any rent-free accommodation.
Significant Influence:
Significant influence may be exercised in several ways for example , by
representation on the Board of directors, participation in the policy making
process, material inter-company transaction, interchange of managerial
personnel or dependence on technical information.
Listed and Unlisted Company:
A listed company is a public company. It has issued shares of its stock through
an exchange.
An unlisted company can be public limited or private limited and not listed on
any stock exchange.
Related party as per SEBI ( Securities and Exchange Board of India)
With an aim to review and strengthen the regulatory norms pertaining to RPTs,
undertaken by listed entities in India, SEBI constituted a Working Group in
November 2019 comprising members from the Primary Market Advisory
Committee (PMAC), including persons from the Industry, Intermediaries, Proxy
Advisors, Stock Exchanges, Lawyers, Professional bodies, etc.
As per existing provisions in the LODR (Listing Obligations and Disclosure
Requirements )
a) Regulation 2 (zb) of LODR Regulations defines “related party” as
related parties defined under section 2(76) of the Companies Act, 2013 or
under the applicable accounting standards.
b) LODR Regulation further deems any person or entity belonging to the
promoter or promoter group of the listed entity and holding 20% or more of
the shareholding of the listed entity, to be a related party.
As per recommendation of the Working Group
a) All persons or entities belonging to the ‘promoter’ or ‘promoter group’,
irrespective of their shareholding in the listed entity, shall be deemed to be
related parties.
b) Further, any person or any entity, directly or indirectly (including with
their relatives), holding 20 percent or more of the equity shareholding in
the listed entity, shall be deemed to be a related party.
Related Party as per Companies Act, 2013
According to section 2(76) of the Company’s act , 2013 related party with
reference to company means –
i) a director or his relative;
) a key managerial personnel or his relative;
i) a firm, in which a director, manager or his relative;
ii) a private company in which a director or manager or his relative is a member
or director;
iii) a public company in which a director or manager is a director and holds
along with his relatives, more than 2% of its paid-up capital;
iv) any body corporate whose Board of Directors, managing director or manager
is accustomed to act in accordance with the advice, directions or instructions of
a director or manager.
v) any person on whose advice, directions or instructions a director or manager
is accustomed to act provided that nothing in sub-clauses (vi) and(vii) shall
apply to the advice ,directions or instructions given in a professional capacity.
vi) any body corporate which is-
A) a holding , subsidiary or an associate company of such company;
B) a subsidiary of a holding company to which it is also a subsidiary ; or,
C) an investing company or the venturer of a company means a body corporate
Let’s say , Mr X,Y and Z are directors of Company XYZ Ltd.. The related parties
for the company, in general, are as under:
1. A director or his relative. Relative means a member of the same HUF ,
husband, wife, father, stepfather, mother, stepmother, son, stepson, daughter,
stepdaughter, son’s wife, daughter’s husband, brother, stepbrother, sister,
stepsister.
1 2 3 4 5 6 7
8 9 10 11 12 13 14
15 16 17 18 19 20 21
22 23 24 25 26 27 28
29 30 31
« Jul

Mr X, Mr Y and Mr. Z are directors and the relatives of these Directors are
considered as related parties.
2. Key managerial personnel or his relative
Say, Mr A is a Company Secretary , his relatives will be considered as related
parties.
3. A firm in which a director, manager or relative is a partner
Mr X is a partner at PQR Pvt. Ltd., another firm. This firm will also be
considered as a related party.
4. A private company in which a director , manager , or relative is a member or
director
Mr. Y is a director of B Pvt. Ltd.- in this case B Pvt. Ltd. Becomes a related
party. Even when Mr Y’s relative is a member or director in B Pvt. Ltd., this
company will be considered as a related party.
5. A public limited company in which a director or manager is a director and
holds along with his relatives more than 2% of its paid-up capital
Mr Z along with his relatives holds more than 2% of the paid-up capital of C
Ltd.. In this case ,Mr Z will be considered as a related party.
6. Any body corporate whose board of directors , MD or manager is required to
act in accordance with the advice , directions or instructions of a director or
manager(Not applicable in cases when these directions are followed in a
professional capacity).
When P Ltd. acts on the directions of Mr. X, P Ltd. will be a related party.
7. Any person on whose advice , directions or instructions a director or manager
is required to act (Not applicable when this done in a professional capacity)
Mr A holding 51% in XYZ Ltd. on whose advice Mr. X has to act will be
considered as a related party.
8. Holding , Subsidiary or Associate of such company
These all will be considered as related parties:
– ABC Ltd holding 51% in XYZ Ltd. (Holding Company)
– XYZ Ltd. holding 51% in LMN Ltd. (Subsidiary Company)
– PQR Ltd. holding 30% in XYZ Ltd. (Associate Company)
9. Any subsidiary which is a subsidiary of a holding company to which it is also
a subsidiary.
PQR Ltd. & XYZ Ltd. are both subsidiaries of ABC Ltd.. Thus PQR Ltd also
becomes a related party.
Related Party as per Goods and Service Tax( GST)
Legal persons and persons who are associated in the business of one another
in that one is the sole agent or sole distributor or sole concessionaire, of the
other. Further, related parties are also referred to as related persons or distinct
persons under GST. Persons include a legal person who can be individuals,
HUF, company, firm, LLP, co-operative society, a body of individuals, local
authority, government, or an artificial juridical person. It also includes entities
incorporated outside India. Persons who are associated with one another’s
business or is a sole agent or sole distributor or sole concessionaire shall be
deemed to be related.
Related persons are defined u/s 2(84) of the GST Act. Persons shall be
deemed to related if they fall under any of the categories below:
a) Officer or director of one business is the officer/director of another
business

b) Businesses legally recognised as partners
c) An employer and an employee
d) Any person who holds at least 25% of shares in another company ,
either directly or indirectly
e) One of them controls the other directly or indirectly
f) They are under common control or management
g) The entities together control another entity
h) The promoters or managerial persons are members of the same family
Related Party as per Income tax Act,1961
As per section 2(41) of Income Act,1961 the relative means in relation to
individual means spouse, brother or sister or any lineal ascendant or
descendant of that individual.
As per section 56(2) of the Income tax Act ,1961 relative means in case of an
individual –
a) Spouse of an individual
b) Brother or sister of the individual
c) Brother or sister of the spouse of the individual
d) Brother or sister of either of the parents of the individual
e) Any lineal ascendant or descendant of the individual
f) Any lineal ascendant or descendant of spouse of the individual
g) Spouse of the persons referred to in items (b) to ( f)
Summing up, the related parties for the company shall be the directors
themselves and their relatives such as the spouse, father, stepfather, mother,
stepmother, son, son’s wife, stepson , daughter, stepdaughter , brother,
stepbrother , sister, stepsister , daughter’s husband etc.
Related Party as per Customs:
Customs looks at the seller and buyer relationship because that relationship
may affect the price , which may affect the value being declared on the customs
entry.
The term “related” has been defined in Rule 2 (2) of the CVR to provide that
buyer and seller shall be deemed to be “related” if
They are officers or directors of one another’s businesses;
They are legally recognized partners in business;
They are employer and employee;
Any person directly or indirectly owns, controls or holds five per cent or
more of the outstanding voting stock or shares of both of them;
One of them directly or indirectly controls the other;
Both of them are directly or indirectly controlled by a third person;
Together they directly or indirectly control a third person; or
They are members of the same family.
Therefore, typically all transactions involving import of goods by an Indian
company and its holding company or any associated/affiliated Group company
located outside India are considered to be transactions between related parties
which are investigated by the Customs authorities.
Related Party as per Accounting Standards Accounting Standard-18
Related party means at any time during the year, one party has an ability to:
Control the other party, exercise significant influence over the other party in
making financial and/or operating decisions.
Here control means
a) ownership , direct or indirect of more than 50% of the voting power of
an enterprise. In case of company control of the composition of the board
of directors
b) substantial interest in voting power and power to direct the financial and
/ or operating policies of the enterprise.
The objective of this standard is to establish requirements for disclosure of
a) related party relationship
b) transaction between a reporting enterprise and its related parties

Related party transaction is transfer of resources or obligations between related
parties, regardless of whether or not a price is charged.
As per AS-18 a relative broadly includes-
Associate Companies
Subsidiaries
Fellow Subsidiary
Intermediary Companies
Controlled Companies
Holding Company
Key Managerial Personnel and there relatives
Individuals owning direct or indirect interest in Enterprise the voting power
of the reporting enterprise or having significant influence over the
reporting company or relatives of such individuals.
As per AS-18 KMP means Key Managerial Personnel which includes “those
persons who have the authority and responsibility for planning, directing and
controlling the activities of the reporting enterprise”.
Indian Accounting standard 24:
Indian Accounting Standard 24 requires disclosures to be made by a parent
entity regarding its transactions , outstanding balances with entities i.e.
associates, joint ventures or subsidiaries, collectively referred to as Related
party. Hence related party refers to an entity or person that is related to the
reporting entity
The objective of IAS 24 is to ensure that an entity’s financial statements contain
the disclosures necessary to draw attention to the possibility that its financial
position and profit or loss may have been affected by the existence of related
parties and by transactions and outstanding balances, including commitments,
with such parties.
A related party is a person or entity that is related to the entity that is preparing
its financial statements (in this Standard referred to as the ‘reporting entity’).
(a) A person or a close member of that person’s family is related to a
reporting entity if that person: (i) has control or joint control of the reporting
entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity
or of a parent of the reporting entity.
(b) An entity is related to a reporting entity if any of the following
conditions applies:
(i) The entity and the reporting entity are members of the same group
(which means that each parent, subsidiary and fellow subsidiary is related
to the others).
(ii) One entity is an associate or joint venture of the other entity (or an
associate or joint venture of a member of a group of which the other entity
is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an
associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of
employees of either the reporting entity or an entity related to the reporting
entity. If the reporting entity is itself such a plan, the sponsoring employers
are also related to the reporting entity.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or
is a member of the key management personnel of the entity (or of a parent
of the entity).
The entity, or any member of a group of which it is a part, provides key
management personnel services to the reporting entity or to the parent of
the reporting entity.
Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of the
entity, directly or indirectly, including any director (whether executive or
otherwise) of that entity.
Case-1 Director/KMP and his relative

Related Party Transaction:
Related Party Transaction can be understood as a deal or arrangement made
between two parties or entities who are joined by a pre-existing business
relationship or common interest. It is a transfer of resources , services or
obligations between a reporting entity and a related party, regardless of whether
a price is charged.
All related party transactions require approval of Audit Committee. All contracts
that are (1) not in the ordinary course of business but at arm’s length (2) in the
ordinary of course of business but not at arm’s length or (3) not in the ordinary
course of business and not at arm’s length require prior approval of board of
directors or shareholders based on certain thresholds.
Penalties: Any director or any other employee of the company , who had
entered into or authorised the contract in violation, as per section 188 of the
companies act they are punishable :-
a) In case of listed companies, imprisonment upto 1 year or fine from
25,000 to 5 lakhs or both
b) In case of other companies , fine from 25,000 to 5 lakhs.
Main purpose of Related Parties regulation:- To regulate transactions between
the company , its subsidiaries and its related parties with a view to ensure that
such transactions are executed on an arm’s length basis and is transparent and
fair manner.

Why are Related Party Transactions are important?- They provide transparency
on how its financial position and financial performance may be affected by
transaction with related parties which may or not be conducted on an arm’s
length basis.
Under the new law, in relation to every RPT, directors have to necessarily check
most importantly the following two criteria-
a) Whether the contracts or arrangements is in the “ordinary course of the
business” of the company
b) Whether the terms and conditions of such contracts or arrangements
are on “arms length basis”.
The transaction will be with Related Party in case it is with any of the following:-
a) With any Director of Company
b) With any relative of a Director
c) With any KMP or relative of a KMP
d) With any firm in which Director or his relative is a partner.
e) With any private Company in which a Director is a member or Director)
f) With a Public Company in which a Director is a member or Director and
additionally holds along with his relative(s) 2% or more paid-up share capital of
a Public Company.
g) With a Subsidiary Company
h) With an Associate Company in which Company has more than shareholding
i) With a body corporate which is significantly influenced by a Director of a
company
j) With a person who has control or significant influence over the Company.
Following transactions with above related parties will constitute related party
transactions:-
a) Sale, Purchase or supply of any goods or material by a Company
b) Selling or disposing off or buying any property by Company
c) Leasing of any property by Company
d) Availing or rendering of any services by Company
e) Appointment of any agent for purchase or sale of goods, materials, services
or property by Company
f) Any related party’s appointment to any office or place of profit in Company
g) Company or its subsidiary Company or its associate Company
h) Underwriting the subscription of any securities or their derivatives of
Company
To determine a transaction a related party transaction following points to be
ensured:-
a) The transaction should be entered on an Arm’s length basis
b) Take prior approval of Audit Committee of the Board in respect of all related
party transactions
c) Approval of shareholders through special resolution if the related party
transaction during a financial year exceeds 10% annual consolidated turnover
of a company.
d) Prior approval of the Board is required in case a related party transaction is
not in the ordinary course of business and not on an Arm’s length basis.
Related-party transactions are legitimate activities and serve practical purposes:
They are recognized in corporate and taxation laws.
They have their own standards for accounting treatment.
Systems of checks and balances have been built around them to make
sure they are conducted within these boundaries.
Why related-party transactions, and why now?
Any listed company that is big and liquid enough to be on the radar of
foreign investors is likely to be a part of a larger business group, either as
its flagship or as one of its affiliates. Some of its affiliates may also be
listed, while others are privately held.
Ownership of a company is likely to be concentrated in a single group: a
family or the state. In family-controlled entities, senior management and

board positions, including director and key managerial personnel, are
often filled by family members. In state-controlled entities, these roles are
filled by political appointees. In other words the business is managed by a
dominant shareholder who also has controlling ownership. These
affiliations formed under the umbrella of common ownership are not just
on paper; they are exploited as needed. The dominant control structure
makes it easy for related-party transactions to take place, especially when
some of the entities complement or exist to support the operations of
others.
What is the objective of related party transaction?
The objective of IAS 24 is to ensure that an entity’s financial statements contain
the disclosures that it’s financial position and profit or loss may have been
affected by the existence of related parties and by transactions and outstanding
balances with such parties.
Diagram of Related Party Transaction:
Related Party Transactions as per SEBI
As per existing provisions in the LODR
Regulation 2 (zc) of LODR Regulations defines RPT as any transfer of
resources, services or obligations between a listed entity and a related party
regardless of whether a price is charged or not and a “transaction” with a
related party shall be construed to include a single transaction or a group of
transactions.
“RPT” means a transaction involving a transfer of resources, services or
obligations between:
i. the listed entity or any of its subsidiaries on one hand and a related party of
the listed entity or any of its subsidiaries on the other hand; or
ii. the listed entity or any of its subsidiaries on one hand, and any other person
or entity on the other hand, the purpose and effect of which is to benefit a
related party of the listed entity or any of its subsidiaries.
Thresholds for classification of RPTs as material

Regulation 23 (1) of LODR Regulations inter-alia specifies that transaction with
a related party shall be considered material if the transaction(s) to be entered
into individually or taken together with previous transactions during a financial
year, exceeds 10 percent of the annual consolidated turnover of the listed entity
as per the last audited financial statements of the listed entity.
Any transaction with a related party shall be considered material if the
transaction(s) to be entered into individually or taken together with previous
transactions during a financial year, exceeds Rs.1,000 crore or 5 percent of the
annual total revenues, total assets or net worth of the listed entity on a
consolidated basis as per the last audited financial statements of the listed
entity., whichever is lower, provided that the criterion relating to net worth shall
not be applicable if the net worth of the listed entity is negative.
Approval requirements of the Audit Committee
Regulation 23(2) of LODR Regulations mandates that all RPTs shall require
prior approval of the audit committee.
Recommendation of the Working Group

a) All RPTs and subsequent material modifications shall require prior approval
of the audit committee of the listed entity.
b) RPTs to which the subsidiary of a listed entity is a party but the listed entity is
not a party, shall require prior approval of the audit committee of the listed
entity. Such approval is mandatory only if the value of RPT (whether entered
into individually or taken together with previous transactions during a financial
year) exceeds 10 percent of the annual total revenues, total assets or net worth
of the subsidiary, on a standalone basis, for the immediately preceding financial
year, whichever is lower, provided that the criterion relating to net worth shall
not be applicable if the net worth of the subsidiary is negative.
c) Further, prior approval of the audit committee of the listed entity shall not be
required for RPTs of listed subsidiaries where the listed entity is not a party.
Regulation 23(1) of LODR regulations specifies that transaction with a related
party shall be considered material if the transaction(s) to be entered into
individually or taken together with previous transactions during a financial year
exceeds 10% of the annual consolidated turnover of the listed entity as per
audited statement.
Approval of shareholders for material RPTs
In terms of regulation 23(4) of LODR Regulations, all material RPTs shall
require approval of the shareholders through resolution and no related party
shall vote to approve such resolutions whether the entity is a related party to the
particular transaction or not.
a) All material RPTs and subsequent material modifications, shall require prior
approval of the shareholders through resolution and no related party shall vote
to approve such resolutions whether the entity is a related party to the particular
transaction or not.
b) Prior approval of the shareholders of a listed entity shall not be required for a
RPT to which the listed subsidiary is a party but the listed entity is not a party.
Exemption from the applicability of provisions related to RPTs

In terms of regulation 23(5) of LODR, provisions of regulation 23 (2), (3) and (4)
of LODR (dealing with prior approval of audit committee, omnibus approval and
shareholder approval, respectively) are not applicable in the following cases:
(a) transactions entered into between two government companies;
(b) transactions entered into between a holding company and its wholly owned
subsidiary whose accounts are consolidated with such holding company and
placed before the shareholders at the general meeting for approval.
The Working Group recommended to exempt transactions entered into between
two wholly-owned subsidiaries of the listed holding company, whose accounts
are consolidated with such holding company and placed before the
shareholders at the general meeting for approval from the provisions of
regulation 23 (2), (3) and (4) of LODR in addition to the existing exemptions.
Diagram of RPTs as per Existing Provision:-
Diagram of RPTs as per Recommendation of Working Group

Related Party Transaction as per Companies Act:
Section 188 of the Companies Act describes provisions of Related Party
transaction. It talks about Related Party Transactions that are applicable to both
Private and Public Limited Company.
Generally, any person or any entity which is related to the reporting entity is said
to be a related party. Further, a related party can be the situation when a person
or a close member of that person’s family is associated with an entity.
Except with the consent of the Board of Directors given by a resolution at a
meeting of the Board no company shall enter into any contract or arrangement
with a related party with respect to—
(a) sale, purchase or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods, materials,
services or property;
(f) such related party’s appointment to any office or place of profit in the
company, its subsidiary company or associate company; and
(g) underwriting the subscription of any securities or derivatives thereof, of
the company:
Provided that no contract or arrangement, in the case of a company having a
paid-up share capital of not less than such amount, or transactions exceeding
such sums, as may be prescribed, shall be entered into except with the prior
approval of the company by a resolution
Provided further that no member of the company shall vote on such resolution,
to approve any contract or arrangement which may be entered into by the
company, if such member is a related party
Provided also that nothing in this sub-section shall apply to any transactions
entered into by the company in its ordinary course of business other than
transactions which are not on an arm‘s length basis
Provided also that the requirement of passing the resolution under first proviso
shall not be applicable for transactions entered into between a holding company
and its wholly owned subsidiary whose accounts are consolidated with such
holding company and placed before the shareholders at the general meeting for
approval.
Related Party Transaction as per Income Tax Act:
Section 40A(2) of Income Tax Act,1961 deals with payments to relatives and
associated persons.
Where any assessee , being an individual who carries on business or
profession, makes any payment for any expenditure to any relative of such
individual , then the transaction is a related party transaction under section
40A(2)(b)(i) of Income Tax Act ,1961.
Example: Mr. X is a Chartered Accountant who derives his income from the
profession. For the financial year 2020-21 , he has made payment for office rent
to his wife Mrs. Y. As per section 2(41), the spouse of an Individual is a relative ,
hence the rent transaction is a ‘related party transaction’ for the purpose of
Income tax.
As per section 40A(2)(b)(ii) of Income tax act , any transaction between a
company and its director or any relative of any of its directors is a ‘related party
transaction’ for the purpose of income tax act.

Example: Mr. X is a director of ABC Ltd. Which is engaged in the business of
manufacturing plastic bags . For the financial year 2020-2021 , ABC Ltd.
has made payment for office electricity charge to Mrs.Y wife of Mr.X.
As per section 2(41) , the spouse of an Individual is a relative , hence the
electricity charge transaction between ABC Ltd and Mrs Y, wife of director Mr. X
is a ‘related party transaction’ for ABC Ltd. under the income tax act.
Similarly any transaction between a firm and its partner or any relative of any of
its partners is a ‘related party transaction’ for the purpose of income tax under
section 40A(2)(b)(ii).
Example: Mr. X is a partner of ABC Ltd. which is engaged in the business of
garments . For the financial year 2020-2021 , ABC Ltd. has made payment for
publicity expenses to Mr Z, son of Mr. X.
As per section 2(41), the spouse of an individual is a relative, hence the
publicity transaction between ABC Ltd. and Mr.Z, son of Mr. X is a ‘related party
transaction’ for ABC Ltd. Under the income tax.
As per section 40A(2)(b)(iii) income tax act, where an assessee makes any
payment for any expenditure to any individual who has a substantial interest in
the business or profession of the assessee or any relative of such individual,
then the transaction is a related party transaction.
Example : ABC Ltd. has made payment for marketing expenses to Mr.X who
holds 25% of shares of ABC Ltd. . This is a ‘related party transaction’ for ABC
Ltd. under the income tax. The position will also remain the same if such
expense is paid to the wife or son of Mr. X.
If Mr. X holds 10% shareholding in the company instead of 25% then it would be
treated as irrelevant. For determining the threshold limit of substantial holding,
standalone holding needs to be considered and shall not be clubbed under any
circumstances.
As per section 40A(2)(b)(iv) of income tax act where any assessee makes any
payment for any expenditure to any company which has a substantial interest in
the business or profession of the assessee and any director of such a company
or any relative of such director , then the transaction is a related party
transaction.
Example: ABC Ltd has made payment for publicity expense to XYZ private
limited which holds 25% of shares of ABC Ltd. Mr. X is a director of XYZ private
limited. This is a ‘related party transaction’ for ABC Ltd under the income tax.
The position will also remain the same if the expense is paid to Mr. X or his
relative.
In this case it must be remembered that payment transaction from the holding
company to subsidiary company is not covered under section 40A(2)(b)(iv)
since the holding company holds substantial interest in the subsidiary company
and not the subsidiary company holds any interest in the holding company. If
the subsidiary company makes any payment to its holding company then the
transaction will be treated as related party transaction for the subsidiary
company.
Example: A Ltd holds 35% shares in B Ltd and 25% shares in C Pvt ltd . Hence
,any transaction between C Pvt ltd and B Ltd shall be a related party transaction
under section 40A(2)(b)(iv) for C Pvt ltd.
As per section 40A(2)(b)(v) where any assessee makes any payment for any
expenditure to any company whose any of the director of the company has a
substantial interest in the business or profession of the assessee the any
transaction with such a company in which he is a director or any other director
of the company is a related party transaction.
Similar provision is provided for a firm, associate and HUF.
Example: Mr. X is a director of XYZ Ltd. holds 25% equity shares of Y Ltd. He is
also a partner of ABC Ltd. having a 30% profit sharing ratio.
Y Ltd. paid rent to XYZ ltd. and purchased goods from ABC Ltd. during FY
2020-2021. The rent transaction between Y Ltd and ABC Ltd is a related party
transaction since the payee’s director holds substantial interest in Y Ltd. The
position would remain same had the rent was paid to Mr. X or his relative
instead of XYZ Ltd.
Similarly the purchase transaction between Y Ltd and ABC Ltd is also a related
party transaction for the above mentioned reason.
As per section 40A(2)(b)(iv)

a) where any individual assessee makes any payment for any expenditure
to any person having business or profession and the individual or any
relative of such individual has a substantial interest in the business or
profession of that person , then any payment for expenditure between the
individual and the person shall be regarded as a related party transaction
for the purpose of income tax.
b) Where the assessee is a company and makes any payment for any
expenditure to any person having business or profession and the
company or any director of the assessee company or relative of such
director HSS a substantial interest in the business or profession of that
person , then any payment for expenditure between the company and the
person shall be regarded as a related party transaction for the purpose of
income tax.
Similar provision is provided for a firm or an AOP /HUF and the partners and
members and relatives of such partner or member. The related party
transactions are determined from the point of assessee. The relationship may
be due to being a relative of the specified individuals or because of substantial
interest.
It is further to be noted that simply making payments to related parties does not
amount to disallowance. The disallowance of any such expenditure is restricted
to the excessive or unreasonable portion of the expenditure as compared to the
market value of the goods , services or facilities. So the excessive or
unreasonable expenditure considered by the assessing officer shall not be
allowed as deduction.
Example : If X purchases goods from Y for Rs. 30,000 and debits the said
amount in the profit and loss account . But the fair market value of such goods
is only Rs. 20,000 . This means X should have charged only Rs. 20,000 in the
Profit and loss account.
Therefore according to section 40A(2) of income tax act , excess amount of Rs.
10,000 is to be added back to be profit while computing business income of X.
Related Party Transaction Approval Matrix:
Where members(shareholders) approval required:
Related Party Transaction as per Goods and Service Tax (GST):
Supplies between the related persons with consideration in arm’s length shall
constitute as ‘Supply’ like any other transaction. Whereas, the supply made
between related persons for inadequate or no consideration is covered under
Schedule I of the GST Act.
Schedule I – Section 7 of CGST Act
Transactions between related persons and other activities of GST Schedule I
will be treated as supply even if made without any consideration under
Schedule I of the GST Act.
For instance, TATA Steel and TATA Motors are both considered separate legal
entities under TATA Sons, even though the former supplies inputs to the latter.

Such business entities which may have separate legal existence while sharing a
common control, fall under the definition of ‘related person” under GST law.
Activities to be treated as Supply even if made without consideration
1) Permanent transfer or disposal of business assets where input tax credit has
been availed on such assets.
2) Supply of goods or services or both between related persons or between
distinct persons as specified in section 25, when made in the course or
furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial
year by an employer to an employee shall not be treated as supply of goods or
services or both.
3) Supply of goods—
(a) by a principal to his agent where the agent undertakes to supply such
goods on behalf of the principal; or
(b) by an agent to his principal where the agent undertakes to receive
such goods on behalf of the principal.
4) Import of services by a taxable person from a related person or from any of
his other establishments outside India, in the course or furtherance of business.
Related Party Transactions as per Customs:
Rule 3 of the export value declaration stipulates that the Transaction Value for
export goods shall be accepted even where buyer and seller are related,
provided that the relationship did not influence the price of the goods.
As per rule 5 of export value declaration the proper officer of customs shall ,
wherever possible, use a sale of similar goods at the same commercial level
and in substantially the same quantities as the goods being valued.
Rule 3(3)(a) provides that where the buyer and the seller are related, the
circumstances surrounding the sale shall be examined and the transaction
value shall be accepted as the value of imported goods provided that the
relationship did not influence the price.
Rule 3(3)(b) provides an opportunity for the importer to demonstrate that the
transaction value closely approximates to a “test” value previously accepted by
the proper officer of customs and is therefore acceptable under the provisions of
rule 3.
The investigation is done by “special valuation branch(SVB) who investigated
transactions involving special relationship between buyer-seller or those
involving other special circumstances surrounding the sale of imported goods.
Related Party Transactions as per Accounting Standards:
Accounting Standard 18
As per AS-18, Related Party Transaction includes:
Salary to Director
Advance against share capital given
Lease Rent on equipment received
Securities Deposit Receipt-Refunded
Unsecured Loan (taken/given/returned)
Loan & Advances
Share application money invested
Share Application money received
Shares Issued.
Indian Accounting Standard 24
A related party transaction is a transfer of resources, services or obligations
between a reporting entity and a related party, regardless of whether a price is
charged. If an entity has had related party transactions during the periods
covered by the financial statements, IAS 24 requires it to disclose the nature of
the related party relationship as well as information about those transactions
and outstanding balances, including commitments, necessary for users to
understand the potential effect of the relationship on the financial statements.
IAS 24 requires an entity to disclose key management personnel compensation
in total and by category as defined in the Standard.
FAQ on Related Party and Related Party Transaction:
1) Is a related party a third party?- Third parties include unrelated business
entities such as unrelated vendors, customers, banks etc. Related parties

include group companies such as holding company, subsidiary company, key
management personnel and shareholders that have substantial interest in the
business entity.
2) Is associate company a related party?- An associate includes subsidiaries of
the joint venture. Therefore an associate’s subsidiary and the investor that has
significant influence over the associates are related to each other.
3) Is promoter a related party?- Yes. The definition of the related party under the
listing regulation explicitly includes a promoter or member of a promoter group
of a listed entity.
4) Is liaison office a related party?- A liaison office is not a separate legal entity .
It is considered as an extension of its principal office. All the expenses of the
liaison office are met by the head office . As per master circular of RBI a liaison
office (LO) can undertake only liaison activities i.e. It can act as a channel of
communication between Head office abroad and parties in India. It is not
allowed to undertake any business activity in India and cannot earn any income.
5) Why are Related Parties Important?: Related parties control authorising and
approving significant transactions and arrangements with related parties and
authorising significant transactions outside the entity’s normal course of
business.
6) How would I know arm’s length price followed or not:- Where more than one
price is determined by the most appropriate method , the arm’s length shall be
taken to be the arithmetic mean of such prices or at the option of the assessee ,
a price which may vary from the arithmetic mean by an amount not exceeding
5% of such arithmetic mean.
7) What is recurrent related party transaction?- Recurrent Related Party
Transaction refers to a related party transaction which is recurrent, of a revenue
or trading nature, which is necessary for day to day operations of the company
or it’s subsidiaries.
8) What is Material Related Party Transactions?
A transaction with a related party shall be considered material if the
transaction(s) to be entered into individually or taken together with previous
transactions during a financial year, exceeds 10% of the annual consolidated
turnover.
9) A Corporate group has several foreign subsidiaries . Will provisions in
relation to related parties apply to foreign companies as well?
Company incorporated under the relevant legislation of a foreign country is not
a “company” under companies act,2013. However transaction by Indian
company with a foreign company, which is a subsidiary , associate, joint venture
etc. would be covered.
10) In case of Companies Act, is the board required to approve all related party
transaction?
The Companies Act, 2013 prescribes that a company needs approval of the
audit committee on all related party transactions.
11) What assessment is required of existing RPTs , if any?
All Companies are required to comply with requirements in relation with RPTs.
Any default will be regarded as non-compliance and may attract penal
provisions under the Companies Act, 2013.
12) Which types of transactions will be regarded as ordinary course of
business?
The ordinary course of business is not defined under the Companies Act, 2013.
It seems that the ordinary course of business will cover the usual transactions,
customs and practices of a business. The institute of Chartered Accountants of
India has included following few examples of transactions that are considered
outside the entity’s normal or ordinary course of business-
a) Complex equity transaction e.g. corporate restructuring or acquisitions,
b) Transactions with offshore entities,
c) Sales transactions with unusually high discounts/ returns
d) Transactions under contracts
13) Whether the provisions pertaining to “related parties” are applicable based
on a financial year?
The provisions pertaining to “related party” and “related party transactions” are
applicable for all contracts with related parties entered on or after 01st

April,2014, irrespective of accounting year followed by the Company.
14) Whether the contracts or arrangements of transaction with related parties
entered on or before 01 April,2014 are also governed the provisions of the
Companies Act,2013?
No, the contracts or arrangements of transactions with related parties entered
on or before 01 April,2014 shall continue to be governed by the provisions of
the erstwhile act and any other applicable provisions.
15) Whether any modification in the contracts or arrangements of transactions
with related parties entered on or before 01 April,2014 are also governed by
the provisions of Companies Act, 2013?
Modification made to such contracts/arrangements on or after 01 April, 2014
shall be governed by the provisions of Companies Act, 2013.
16) Whether the provisions relating to special resolutions u/s 188 are also
applicable to transactions with wholly owned subsidiaries?
No, wholly owned subsidiary companies are exempted from the requirements of
passing a special resolutions, provided requirement of the special resolutions
have been c0mplies by the holding company.
17) Can there be a situation in which contracts or arrangements require special
resolution with related party only when under amended listing agreement and
not under the Companies Act, 2013?
Yes, contracts or arrangements with related parties in the ordinary course of
business and at arm’s length prices are exempted from the approval from the
shareholders and board, except the prescribed approvals under section 177 of
Companies Act,2013. Whereas clause 49 of SEBI requires material related
party transactions to be approved by way of a special resolution in the
member’s meeting, in spite of such transaction being in the ordinary course of
business and carried out at an arm’s length price.
18) How to interpret the term “Ordinary course of its business (OCB) as used in
the context of related party transactions under companies Act,2013?
Which are directly or indirectly connected to or necessary to conduct its
business. For example : Company ABC which is primarily engaged in the
business of manufacturing and selling auto parts and advancing loans to a
related party which is in the business of providing information technology
services , could be viewed as a transaction not in OCB . Whereas if the
company ABC entered into a contract with a related party to avail travel
services for its employees such services being necessary for ABC, ordinary
activities could be regarded as OCB.
19) Are shareholders related parties IAS 24?
Major shareholder and his wife are related parties, because they are a
person or a close family member of that person (wife) who control the entity A.
Entity B is a related party of an entity A, because it is controlled by close family
member of a major shareholder of A (not because it is the sole customer).
20) Regulation 2(1)(b) of LR defines an ‘associate company’ to mean any entity
which is an associate under the Companies Act, 2013 or under the applicable
accounting standards. Whether both conditions have to be met or either of the
two?
The definition of associate company should be viewed under the Companies
Act, 2013 as well as Accounting Standards. If the condition is met under either
of the two, then such entity should be classified as an associate company.
21) Regulation 2(1) (zb) of LR defines the term ‘Related party’ to mean related
party under the Companies Act, 2013 or under the applicable Accounting
Standards. Whether both conditions have to be met or either of the two?
The definition of related party should be viewed under the Companies Act, 2013
as well as Accounting Standards. If the condition is met under either of the two,
then such party should be classified as a related party. Further, any person or
entity belonging to the promoter or promoter group of the listed entity and
holding 20% or more of shareholding in the listed entity shall be deemed to be a
related party.
22) Regulation 23 (4) provides that all material related party transactions shall
require approval of the shareholders through resolution and no related party
shall vote to approve such resolutions whether the entity is a related party to the
particular transaction or not. In this regard, whether only those related parties
who are related to the concerned transaction/ contract should not vote to
st
st
st
st

approve or whether related parties should altogether not vote to approve such
transaction?
The requirement under Regulation 23(4), is applicable for listed entities subject
to the provisions of Regulation 15. Hence, for applicable entities, the regulations
clearly provide that all material related party transactions shall require approval
of the shareholders through resolution and no related party shall vote to
approve such resolutions whether the entity is a related party for the particular
transaction or not.
230 Regulation 24(1) prescribes having at least one independent director on the
board of directors of the listed entity as a director on the board of directors of
‘unlisted material subsidiary, incorporated in India or not’. Sub-regulations (2),
(3) and (4) to the same regulation refer to ‘unlisted subsidiary’. Whether such
sub-regulations (2), (3) and (4) are applicable to all unlisted subsidiaries or only
material unlisted subsidiaries incorporated in India?
Listed entities may be guided by the provisions of Regulation 24. Wherever
‘unlisted material subsidiary’ and ‘unlisted subsidiary’ have been distinctly
mentioned in a particular subregulation, such sub-regulation shall be applicable
to material unlisted subsidiaries or all unlisted subsidiaries as the case may be.
24) Regulation 24 (4) requires that the management of the unlisted subsidiary
shall periodically bring to the notice of the board of directors of the listed entity,
a statement of all significant transactions and arrangements entered into by the
unlisted subsidiary. Whether the requirement is applicable only to the material
unlisted subsidiary?
The requirement is applicable to all unlisted subsidiaries.
25) Does every related party import needs to be referred to SVB Are there any
exemptions?
Are there any exemptions? As per the prescribed procedures, following cases
are not required be taken up for inquiries by SVBs: Import of samples and
prototypes from related sellers; Imports from related sellers where duty
chargeable is unconditionally fully exempted or nil.
26) What is the basis of valuation of goods for the purpose of computing
customs duties?
Custom Duties are calculated on the ‘assessable value’ of the goods as per
Section 14 of the Customs Act, which is the ‘transaction value’ agreed between
the supplier and the importer subject to certain inclusions (such as freight,
insurance etc) in the transaction value if not already included and subject to the
condition that the buyer and seller are not related. In case the buyer and seller
of the goods are related, the value is to be determined as per Customs
Valuation (Determination of value of Imported Goods) Rules, 2007 (‘CVR’)
framed in this regard.
27) Which department of customs authorities investigates related party
transactions . What is a Customs SVB?
The SVB is a special unit within the Indian Customs department which
specializes in investigating the valuation of the transactions between ‘related
persons’, as defined under Rule 2 (2) of CVR. Specific customs officials are
posted to this department of customs who carry out the investigation and
evaluate whether the intercompany prices of goods are influenced due to the
relationship between the parties, with the intention to reduce the Customs Duty
liability or not.
28) Does every related party import needs to be referred to SVB? Areb thre any
exemption?
As per the prescribed procedures, following cases are not required be taken up
for inquiries by SVBs:
Import of samples and prototypes from related sellers;
Imports from related sellers where duty chargeable is unconditionally fully
exempted or nil.
Any transaction where the value of imported goods is less than INR 100
Thousand but cumulatively these transactions do not exceed INR 2.5
Million in any financial year.
Tags: Companies Act, Companies Act 2013, Related Party Transactions
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Home > India > Corporate/Commercial Law
CONTRIBUTOR
Most Read: Contributor India, May 2022
ARTICLE
India: Related Party Transactions: Analysis Of The Recent
Amendments By SEBI
15 February 2022
by
Indranil Chakravorty
and Amar Tandon
S&A Law Offices
Your LinkedIn Connections
with the authors
INTRODUCTION
The term 'related-party transaction' can be
understood as a deal or arrangement made between two parties or
entities who are joined
by a pre-existing business relationship or
common interest. A company enters into a business deal with that
party with whom it is
either familiar or shares some mutual
interest. In the Indian context, the statute which deals with the
Related Party Transactions (RPTs)
is the Companies Act, which does
not bar the Related Party Transaction but lays down certain safety
measures that are required to be
followed while dealing with RPTs.
As per Section 188 of the Companies Act which lays down certain
conditions for the regulation of
Related Party Transactions, the
making of disclosure of the transaction to the Board and
shareholders forms the primary pre-requisite.
This year, SEBI has
made amendments1 to the RPT regime based on the Working
Group Report on Related Party Transactions (which
comes into force
from April 1st, 2022). This article explains the major
amendments made by SEBI with their possible impact on future
transactions.
"PROMOTER" UNDER THE AMBIT OF "RELATED
PARTY"
The issue of transaction by a person or entity belonging to the
promoter/ promoter group not constituting a related party under
Section
2(76) has been one of the major lacunae which have been
misused by parties on numerous occasions over the past few decades.
SEBI
has addressed this void by including any person/entity
belonging to the promoter/ promoter group within the definition of
"related
party" which is a significant step towards
curbing such entities from escaping regulatory mechanisms.
Prior to the amendment the anomaly which remained unanswered in
the definition of a related party under section 2(76) of the
Companies Act, 2013 (Act") was that of exclusion of
promoter [as defined under Section 2(69)] or a person or entity
belonging to the promoter/
promoter group from the definition
of "related party". Besides, the definition shall also
include a person/ entity holding equity shares of
20% or more from
April 1st, 2022, and 10% or more from April
1st, 2023.
Therefore, with the introduction of this amendment, any person
or entity can be considered as Related Party if it belongs to the
promoter or promoter group of the listed entity or if it holds more
than or equivalent to 20% of equity shares either directly or on a
beneficial interest basis as per section 89 of the Companies Act,
2013 at any time during preceding Financial Year and effective from
1st
April 2023, it will apply to any person or entity
holding 10% or more equity shares.
APPROVAL OF AUDIT COMMITTEE VIS-À-VIS TRANSACTIONS
UNDERTAKEN AT SUBSIDIARY LEVEL
Over the past few years, several corporate scams arising from
transactions at the subsidiary level have managed to escape the
necessary regulatory scrutiny. As per the regulatory regime prior
to the amendment, the Audit Committee approval shall be mandatory
if the value of the transaction between two or more subsidiaries of
the listed entity exceeds 10% of the annual turnover.
As per the amendment, if the provisions of Regulation 23 and
15(2) are applicable on the listed subsidiary(s), the approval of
the audit
committee shall not be required for transaction(s)
entered into between them and a related party.
Another contemplative amendment on the issue of a subsidiary is
the inclusion of an overseas subsidiary under Section
2(87) of the
Companies Act. Further, an Indian holding
company will be required even for transactions undertaken between
two or more overseas
subsidiaries of the listed entity.
However, amendment relating to the overseas subsidiaries of the
listed entity may result in a conflict of laws with a view of
foreign and
Indian jurisdictions on the issue of approval from the
Audit Committee. There have been several Indian
judgments2 that reiterate the
fact that a parent company
exercising shareholders' influence on its subsidiaries cannot
obliterate or over-shadow the authority or
decision-making power of
the subsidiary's directors while emphasizing that the directors
of a subsidiary do not owe a duty to the
parent company but only to
the subsidiary3. Thus, it will result in making the
Boards of such overseas subsidiaries "functus
officio" when
it comes to the approval of Related Party
Transactions due to overarching extraterritorial application of
Regulation 23 of the SEBI (Listing
Obligations and Disclosure
Requirements). This scenario may also attract judicial scrutiny on
the ground of Regulation 23 being extra-
territorial with a view of
tests slated in GVK Industries v. Income Tax
Officer4 discussing the application of Article 245
of the Indian
Constitution.
MATERIALITY THRESHOLD
A transaction with a Related Party where the parties entering
the transaction individually or in combination with previous
transactions
exceeds the 10% of Annual Consolidated Turnover as per
Regulation 23(1) of the SEBI (Listing Obligations and Disclosure
Requirements)
Regulations, 2015, can be defined as a Material
Related Party Transaction. After the introduction of the sixth
Amendment of 2021, any
"material modification" in the
Related Party Transaction shall be granted prior approval by the
Audit Committee which has been
entrusted with this additional
obligation.
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CONTENT


With the present Amendment, to cover transactions that exceed
Rs. 1000 Crore or 10% of the
annual consolidated turnover (whichever
is lower), the apex
regulator, SEBI, has revised the materiality threshold to obtain
the approval of the shareholders.
However, the amendment is silent as to what would be covered
under the ambit of the definition of "material
modification" and highlights
that the same shall be
defined by the Audit Committee which will disclose it in the policy
for Related Party Transactions of the listed
entity. Nonetheless,
as a caveat, it is also important to point out that the sole
determinant of what constitutes "material modification"
by
the Audit Committee may prove to be counter-productive due to
the absence of any rules or tests for reaching this conclusion.
CONCLUSION
The above-mentioned amendments are a significant step towards
regulating related party transactions and ironing out some creases
which have existed since the past few decades. Such detailed
disclosure even at the subsidiary level provides
much-needed
transparency to all the involved
parties and especially minority shareholders. However, some
amendments may pose a serious threat to
the present corporate
governance scenario, for instance; the absence of any rules or
tests for the Audit Committee to determine
"Material
Modification" and exponential compliance increase on the part
of listed companies.
Footnotes
1. Securities and Exchange Board of India (Listing
Obligations and Disclosure Requirements) (Sixth Amendment)
Regulations, 2021
2. (2011) 4 SCC 36.
3. (2012) 6 SCC 613
4. Ibid.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific
circumstances.
AUTHOR(S)
Indranil
Chakravorty
S&A Law Offices
Amar Tandon
S&A Law Offices
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Public Vs. Private Company
 AMITAV GANGULY | Company Law
 09 Aug 2018  18,891 Views  2 comments
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Background-
Under Indian Companies Act 2013
there are two types of legal entities
{companies} which are extensively
used for carrying out business in
India. The salient features of public
limited Companies and private
limited companies with their
advantages and disadvantages are
given below:-
Public Company Private
Company
Advantages- Public/ Private
Separate legal
existence different
from shareholders
Same For Public & Private–
it gives the perpetual existence of entity not linked
shareholders
Limited liability of
shareholders
Same For both. The personal assets of shareholders are
not to be taken for liabilities of the company
Should have name
at the time of
incorporation
Same For both- as it establishes an identity, existence an
the brand which help in business
Should have a
registered office
within 30 days of
incorporation
Same For both- as through this office communication an
jurisdictional position are established
Memorandum of
Association as a
constitution of the
company and
Articles of
association for the
functioning of the
company are
required for
incorporation.
Same For both– the legal parameters for the existence o
the company and its day to working are clearly laid
down.
Minimum
seven shareholders,
no maximum
Minimum two
and
maximum of
200
shareholders
For Public company, it helps in raising funds from
the public at large
For Private Company, limiting the number helps
keeping the close & private character of the entity
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Minimum three
directors who
should be
individuals and at
least should stay in
India for not less
than 182 days in a
financial year. The
maximum is 15
directors
Minimum is
two directors
and rest are
same
For both. Helps the Board of Directors to be of the
standard size within the specified numbers
Annual General
meeting {AGM} has
to be held each year
and quorum of
shareholders to be
present – five/
fifteen/ thirty
members personally
present depending
upon the total
number of members
AGM has to
be held
similarly but
the quorum
is two
members to
be present
personally
For both. The shareholders’ approval is obtained
annually on matters like approval of final audited
accounts, the appointment of auditors and
appointment of directors, etc., together with other
critical matters like borrowings, investments etc.,
Managerial
remuneration of
directors, Managing
Director, {MD}
Whole Time
Director {WTD}
etc., is restricted
for public
companies linked to
the percentage of
profits.
No such
restriction
For public company , helps in keeping the cost of
remuneration within limits.
For private company they are free to pay as
financials will permit.
Shares can be listed
and publicly traded.
Liquidity of shares &
easily transferable
There is the
restriction in
transferability
of shares.
For Public company, listing or free transferability
helps in raising funds from public . For Private
company, the private or closely held nature is kep
Under rigorous
compliance regime.
Reporting
requirements are
elaborate.
There are
many
exemptions
For Public company, this gives confidence to the
authorities and public which in turn helps in
fundraising and getting other permissions for doing
business.
For private company, the close working of
company with minimum outside interference
possible.
Financial affairs are
public
Financial
affairs are
not generally
needed to be
made public
For public company it gives confidence to the
authorities and the public for funding & carrying ou
business.
For private company, the close nature of
business is maintained.
Management Control may For both: Helps in maintaining continuity of
3. Analysis of Clause 44 of Tax Audit
Report
4. Guidance Note on Tax Audit under
Section 44AB
5. Decoding of Clause 44 of Tax Audit
Report (3CD)
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amitavganguly says:
Control rests with
Board of directors
and majority
shareholders who
may be outsiders
rest with
Board and
shareholders
who may be
a close
group or
individual/s
management
Can be wound up
by due process of
law
Same For both: Helps in bringing an end to the legal ent
with equitable meeting of liabilities and distribution
assets
Tags: Companies Act, Companies Act 2013
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Author Bio
Mr. Amitav Ganguly is a Law Graduate and qualified Company Secretary with more
than three decades of rich experience in senior positions; company secretarial,
corporate legal affairs, management and corporate governance; in different industry
sectors like investment, manufacturing and real estate. A View Full Profile
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Name: AMITAV GANGULY
Qualification: CS
Company: N/A
Location: NEW DELHI, Delhi, India
Member Since: 30 Jun 2018 | Total Posts: 32
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LAVANYA says:
Reply
 May 3, 2019 at 12:23 pm
Thank you very informative.
 April 22, 2019 at 11:12 am
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All about one person company
 KHUSHBOO PATODI | Company Law
 28 May 2021  74,334 Views  0 comment
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Introduction
The Companies Act, 2013 completely revolutionized corporate laws in India by
introducing several new concepts that did not exist previously. One person is also one
of new concept introduced.
One person company (OPC) means a company formed with only one (single) person
One person company (OPC) means a company formed with only one (single) person
as a member, unlike the traditional manner of having at least two members. It is
as a member, unlike the traditional manner of having at least two members
recognition of single person economic entity lightens a path for small traders, service
providers to venture into business by expanding their opportunities through corporate
identity.
Definition
As per provision of section 2(62) of the Companies Act, 2013 defined “one person
company” means a company which has only one person as member.
Any natural person (should not be minor) who is an Indian citizen whether a resident in
India or not i.e. NRI shall be eligible to incorporate a One Person Company and
appoint nominee of an OPC,Timeline for Non-resident individuals has been reduced to
120 days.
Benefits of One Person Company
One person company is corporatization of sole proprietorship, so it has all benefits will
a corporate enjoys aside to this it has some relaxations in provision of company law.
Following are some of benefits of One Person Company.
It has separate legal entity.
The liability of shareholder/ director is limited
The organized version of OPC will open the avenues for more favorable banking
facilities
Legal status and social recognition for your business. It gives suppliers and
customers a sense of confidence in business.
The director and shareholder can be same person
On the death/disability company can be succeed by nominee.
Exemption available from various provisions under Company law.
Difference between OPC and Sole proprietorship
S.No. OPC Sole proprietorship
1. Have separate legal entity No distinction between business and
proprietor
2. Liability of shareholder/director is
limited
Unlimited liability of sole proprietor
3. Income Tax rate applicable of Private
Limited Company
Slab rate wise tax applicable. Hence less tax
implication
4. Compulsory statutory audit for books
of account.
Audit of books of accounts depend upon
amount of turnover.
5. Mandatory compliance of provision of
Company Law.
Provisions of company law do not applicable.
Basic mandatory compliance for OPC
The basic mandatory compliance comprises:
At least one Board Meeting in each half of the calendar year and the time gap
between the two Board Meetings should not be less than 90 days.
Maintenance of proper books of accounts.
Statutory audit of Financial Statements.
Filing of business income tax returns every year before 30th September.
Filing of Financial Statements in Form AOC-4 and Annual Return in proposed
Form MGT 7-A
Detail provision applicable on OPC
Naming the OPC
Section 3(1)(c) of the Act provides that the words ‘One Person Company’ must be
mentioned below the name of the company in bracket wherever it appears.
Members and Directors in an OPC
The minimum and maximum number of members in an OPC can be only one. As
per Section 152(1) of the Act, an individual being member of OPC is deemed as
First Director of the OPC until the director(s) are duly appointed by the member.
A person can be member in only one OPC.
The minimum and maximum number of directors in an OPC can be one (1) and
fifteen (15) respectively.
In order to increase the number of directors beyond 15 directors, a special
resolution must be passed by the OPC to that effect
Nominee in an OPC
An OPC must mention one person as ‘Nominee’ in the event of death, incapacity,
etc. who will-
(a) become a member of OPC;
(b) be entitled to all shares of the OPC, and
(c) bear all liabilities of OPC.
However, written consent of such Nominee to act as nominee must be obtained and
filed with the RoC at the time of incorporation along with MoA and AoA.
A Nominee may, withdraw his consent by giving a notice in writing to the sole
member and to the OPC. The sole member then nominates another person as
nominee within 15 days of the receipt of the notice of withdrawal.
The OPC is required to file with RoC:
(a) notice of such withdrawal of consent;
(b) name of the new person nominated by it (in Form No INC-4 along with the
fee as provided in the Companies (Registration offices and fees) Rules,
2014), and
(c) written consent of the new person so nominated (in Form No. INC-3).
The above filing requirement has to be fulfilled within 30 days of receipt of the notice of
withdrawal of consent from the earlier nominee. Also, a Nominee can be changed at
any time by providing a notice to the RoC.
Where a natural person, being member in One Person Company becomes a
member in another OPC by virtue of his being a nominee in that OPC, then such
person shall meet the eligibility criteria of being a member in only one OPC
within a period of one hundred and eighty days, i.e., he/she shall withdraw his
membership from either of the OPCs within one hundred and eighty days.
Board Meetings and AGM
OPC is deemed to have complied with Sec. 173, if at least one meeting of the
BoD is has been conducted in each half of a calendar year and the gap between
two meetings is not less than 90 days. Section 173 and 174 (Quorum of Meeting
of BoD) will not apply to an OPC in which there is only one director on its Board.
An OPC is not required to hold an AGM.
Financial Statements of an OPC
Financial Statement of an OPC has to be approved by the Board and needs to
be signed by only one director for submission to the auditor.
OPC need not prepare Cash Flow Statement as part of its financial statement.
The copy of such financial statement along with other documents etc. must be
filed with the RoC within 180 days from the closure of the financial year. Report
of the Board to be attached to the financial statement shall mean, in case of an
OPC, a report containing explanations or comments by the Board on every
qualifications, reservations or adverse remarks or disclaimer made by the auditor
in his report.
Annual Returns & Auditor’s Report of an OPC
Annual Returns of an OPC must be signed by a company secretary and the
director. In case there is no company secretary, the signature is required only
from the Director.
Mandatory rotation of auditor after expiry of maximum term is not applicable to
an OPC.
Contract between OPC and Member
Where an OPC enters into a contract with its sole member (who is also the
director), unless the contract is in writing, the OPC should shall ensure that the
terms of the contract/ offer are incorporated in the memorandum of the OPC or
recorded in the first meeting of the Board held next after entering into such
contract.
The above provision is, however, not applicable if the contracts are entered into
by the company in the ordinary course of business.
The other requirement is that the OPC must intimate the RoC about every such
contract recorded in the minute book of its Board under section 193(1) within 15
days of the date of approval by the Board.
Penalty of non-compliance with the provision of the Act
If an OPC or any officer of such company contravenes the provisions of Companies
Incorporation Rules, 2014, such contravening party will be punishable with fine which
may extend to Rs. 10,000/- and with a further fine which may extend to Rs. 1000 for
every day after the first during which such contravention continues.
List of Exemptions Available to OPCs under the Act
Following sections are not applicable to OPCs-
98(Power of Tribunal to call meetings of members, etc.)
100(Calling of EGM)
101 &102 (Notice of Meeting & Statements to be annexed to Notice)
103 (Quorum of Meetings)
104(Chairman of Meetings)
105(Proxies)
106(Restriction on Voting Rights)
107 & 108(Voting by show of Hands & by Electronic Mode)
109&110 (Demand for Poll & Postal Ballot)
111(Circulation of Member’s Resolutions)
Incorporation of OPC
Types of OPCs can be incorporated under the Act.
There can be five types of OPCs that can be incorporated under the new Act, viz.
OPC Limited by Shares;
OPC Limited by Guarantee with Share Capital;
OPC Limited by Guarantee without Share Capital;
Unlimited OPC with Share Capital, and
Unlimited OPC with Share Capital.
Steps for Incorporation of OPC
Incorporation through SPICe (Without filling RUN)
Stakeholders can avail of 5 different services (Name Reservation, Allotment of Director
Identification number (DIN), Incorporation of New Company, Allotment of PAN and
Allotment of TAN) in one form by applying for Incorporation of a new company through
SPICe form (INC-32) with eMoA, , eAOA.
Incorporation through SPICe (With RUN)
Name reservation: RUN service shall be used for name availability.
Incorporate OPC: After name approval, form SPICe shall be filed for incorporation of
the OPC within 20 days from the data of approval of RUN. The company shall file form
INC-22 within 30 days once form SPICe is registered in case the address of
correspondence and registered office address are not same.
Certificate of Incorporation
When the eForm is processed and DIN is generated, an acknowledgement email of
Certificate of Incorporation (CoI) is sent on email.
Further, on approval of SPICe+ forms, the Certificate of Incorporation (CoI) is issued
with PAN and TAN as allotted by the Income Tax Department. An electronic mail with
Certificate of Incorporation (CoI) as an attachment along with PAN and TAN is also
sent to the user.
Conversion of OPC into a Public Company or a Private Company
The One Person Company shall alter its memorandum and articles by passing a
resolution in accordance with sub-section (3) of section 122 of the Act to give
effect to the conversion and to make necessary changes incidental thereto.
A One Person company may be converted into a Private or Public Company,
other than a company registered under section 8 of the Act, after increasing the
minimum number of members and directors to two or seven members and two or
three directors, as the case may be, and maintaining the minimum paid-up
capital as per the requirements of the Act for such class of company and by
making due compliance of section 18 of the Act for conversion.
The company shall file an application in e-Form No.INC-6 for its conversion into
Private or Public Company, other than under section 8 of the Act, along with fees
as provided in the Companies (Registration offices and fees) Rules, 2014 by
attaching documents, namely:- (a) Altered MOA and AOA; (b) copy of resolution;
(c) the list of proposed members and its directors along with consent; (d) list of
creditors; and (e) the latest audited balance sheet and profit and loss account.
On being satisfied that the requirements stated herein have been complied with,
the Registrar shall approve the form and issue the Certificate.
In nut shell, conversion of One Person Company into a Public company or a Private
company shall be permitted anytime other than a company registered under section 8
of the Act, after increasing the minimum number of members and directors to two or
minimum of seven members and three directors as the case may be.
Conversion of Private Limited Company to OPC
A private company other than a company registered under section 8 of the Act may
convert itself into One Person Company by passing a special resolution in the general
meeting.
The company shall file an application in Form No.INC.6 for its conversion into One
Person Company along with fees as provided in in the Companies (Registration
offices and fees) Rules, 2014, by attaching the following documents, namely:-
The directors of the company shall give a declaration by way of affidavit duly
sworn in confirming that all members and creditors of the company have given
their consent for conversion,
the list of members and list of creditors;
the latest Audited Balance Sheet and the Profit and Loss Account; and
the copy of No Objection letter of secured creditors
E –Forms of OPC
One Person Company- Nominee consent form Form INC-3
One Person Company- Change in Member/Nominee Form INC-4
One Person Company –Application for conversion Form INC-6
Tags: Companies Act, Companies Act 2013, OPC
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Name: KHUSHBOO PATODI
Qualification: CS
Company: KHUSHBOO PATODI & ASSOCIATES
Location: INDORE, Madhya Pradesh, India
Member Since: 29 Apr 2021 | Total Posts: 6
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