Related Party under Companies Act 2013

A company is an artificial judicial person having a separate legal entity. Hence, any transaction of a company with a related party must be identified, approved and disclosed, as per accounting standards in India. In this article, we look at the definition of a related party, as per the Companies Act, 2013.

A related party, with reference to a company means:

Director or his/her relative;
Key managerial personnel or his/her relative;
A firm, in which a Director, Manager or his/her relative is a Partner;
Private limited company in which a Director or Manager or his/her relative is a member or Director;
Public limited company in which a Director or Manager is a Director and holds along with his/her relatives, more than 2% of its paid-up share capital;
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;
Person on whose advice, directions or instructions a Director or Manager is accustomed to act. (This section does not apply to persons acting in their professional capacity)
Any company which is a holding, subsidiary or an associate company of such company;
Any company which is a subsidiary of a holding company to which it is also a subsidiary;

Related Party to Director of Company

As per the definition of related party, a Director of a company or his/her relative is also a related party to the company. The following persons are defined as a relative to the Director as per Companies Act, 2013, if:

they are members of a Hindu Undivided Family;
if they are husband and wife;
if the person is related as Father, including step-father;
if the person is related as Mother, including step-mother;
if the person is related as Son, including step-son;
if the person is related as Daughter, including step-daughter;
if the person is related as Son's wife;
if the person is related as Daughter's husband;
If the person is related as Brother, including step-brother(s);
If the person is related as Sister, including step-sister(s);

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Frequently Asked Questions

Common questions about Related Party Transactions in Companies Act 2013.

A related party, with reference to a company, means a director or their relative, key managerial personnel or their relative, a firm in which a director or their relative is a partner, a private company in which a director or their relative is a member or director, and other specified entities and individuals.

As per the Companies Act, 2013, a relative of a director includes members of a Hindu Undivided Family, spouse, father, mother, son, daughter, son's wife, daughter's husband, brother, and sister, including step-relations.

Identifying and disclosing transactions with related parties is crucial to ensure transparency and prevent potential conflicts of interest. It helps stakeholders understand the company's relationships and transactions with related parties, which may influence its financial performance and decision-making.

Failure to disclose related party transactions can lead to penalties, legal consequences, and potential reputational damage for the company. It may also mislead stakeholders and investors, leading to a lack of trust in the company's financial reporting and governance practices.

Yes, the definition of a related party does not apply to persons acting in their professional capacity, such as lawyers, accountants, or consultants, who provide professional services to the company.

Related party transactions typically require approval from the Board of Directors or shareholders, depending on the nature and value of the transaction. Companies must also establish and maintain an effective system of internal controls to identify, monitor, and report related party transactions.

Examples of related party transactions that need to be disclosed include loans or advances given to or received from related parties, purchase or sale of goods or services, leasing arrangements, guarantees or collateral provided, and transfer of resources or obligations.

The Companies Act, 2013 defines a holding, subsidiary, or associate company as a related party if it is a company in which the other company is a holding, subsidiary, or an associate company, respectively.

Key managerial personnel, such as the Chief Executive Officer, Chief Financial Officer, and Company Secretary, and their relatives are considered related parties under the Companies Act, 2013. Their relationships and transactions with the company must be identified and disclosed accordingly.

Companies can ensure compliance with related party disclosure requirements by implementing robust internal policies and procedures, conducting regular training for employees and directors, maintaining proper documentation, and seeking professional advice when necessary. Regular monitoring and internal audits can also help identify and address any non-compliance issues.