Related Party Transactions

Introduction and meaning:

Related party transactions (RPTs) are an integral part of any business, as companies often engage in transactions with parties that have some sort of relationship with the company. The Companies Act 2013 in India defines related parties as directors, key managerial personnel, and their relatives, companies in which a director or key managerial personnel or their relatives have a substantial interest, and firms and other entities in which a director is a partner or a member. These transactions can be in the form of sales, purchases, services, loans, or any other type of agreement.

The Companies Act 2013 has laid down strict rules and regulations for related party transactions to ensure that they are conducted at arm’s length and are in the best interest of the company and its shareholders. The Act requires companies to disclose any related party transactions in their financial statements and to obtain prior approval from the Board of Directors and shareholders if required. This is to ensure that the transactions are fair, reasonable and in the best interests of the company and its shareholders.

One of the key provisions of the Act is that related party transactions must be conducted at arm’s length. This means that the terms and conditions of the transaction should be no less favourable to the company than those that would be obtained in an arm’s length transaction with an unrelated party. This is to ensure that the company is not disadvantaged in any way by the related party transaction.

The Act also requires companies to maintain a register of related party transactions and to disclose such transactions in the Director’s report for each financial year. This is to ensure transparency and accountability in the related party transactions.

In addition, the Act provides for penalties and disqualification of directors in case of non-compliance or non-disclosure of related party transactions. This serves as a deterrent for companies and directors to engage in any unethical or illegal related party transactions. Under the Companies Act 2013 in India, non-disclosure or non-compliance with the provisions related to related party transactions (RPTs) can lead to severe penalties for the company and its directors.

The Act provides for the following penalties for non-disclosure or non-compliance with the provisions related to RPTs:

Fine:

The Act provides for a fine of up to INR 5 Lakhs for non-disclosure or non-compliance with the provisions related to RPTs.

Disqualification of Directors:

The Act also provides for the disqualification of directors for a period of up to 5 years for non-disclosure or non-compliance with the provisions related to RPTs.

Criminal Liability:

The Act also provides for criminal liability for the company and its directors in case of fraud or misfeasance in connection with the RPTs.

Rectification of Register of Members:

In case of default in compliance, the company has to rectify the register of members within 30 days from the date of default.

It’s worth mentioning that the Act also provides for the power of the central government to impose additional penalties or fines in case of non-compliance or non-disclosure of RPTs. Therefore, companies and their directors need to ensure compliance with the provisions related to RPTs under the Companies Act 2013 to avoid any penalties or disqualification of directors.

Conclusion:

Related party transactions are an important aspect of any business and the Companies Act 2013 has laid down strict rules and regulations to ensure that these transactions are conducted at arm’s length and in the best interests of the company and its shareholders. Transparency, fairness and accountability are the key principles underlying these rules and companies must ensure that they comply with these provisions to avoid any penalties or disqualification of directors.