Related Party- Section 2(76) of the Companies Act, 2013

‘Related party’ has got a lot of significance in the public reporting scenario. In case of public companies public and society stake is involved and in case of private companies, even if public stake is not involved, the stake of other elements of society may be directly or indirectly involved. In such situation, maintaining transparency in the working of a company or a body corporate is very much essential. Transactions with related parties may if not entered into with due care may give a wrong perception and may hinder the transparency of the entity. This has given the regulators to keep a check on related party transactions by way of legal provisions in various legislations.

Section 2(76) of the Companies Act, 2013, read with Rule 3 of the Companies (Specification of definitions details) Rules, 2014, defines the term Related Party. The provisions with respect to Related Party Transactions is covered under Section 188 of the Companies Act, 2013.

This article covers the former part, i.e. the definition and meaning of related party as per the 2013 Act. Section 2(76) defines related party as below:

Section 2(76) “related party”, with reference to a company, means—

1. a director or his relative;

2. a key managerial personnel or his relative;

3. a firm, in which a director, manager or his relative is a partner;

4. a private company in which a director or manager or his relative is a member or director;

5. a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital;

6. 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;

7. any person on whose advice, directions or instructions a director or manager is accustomed to act:

8. that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;

9. any company which is—

- a holding, subsidiary or an associate company of such company; or
- a subsidiary of a holding company to which it is also a subsidiary;

10. such other person as may be prescribed;

Section 2(76)(viii) shall not apply with respect to Section 188; to a private company vide Noification F No 1/1/2014- CL.V dated 5th June, 2015

Rule 3 of the Companies (Specification of definitions details) Rules, 2014 reads as follows:

For the purpose of sub-clause (ix) of clause (76) of section 2 of the Act, a director other than an independent director or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party.

Let us analyze the definitions of the same.

If we read the section and the rule together we get the following list of related parties.

1. Director – The term is given in general so it includes all directors including independent director of a company.

2. Relatives of a director including that of an independent director.

3. Key managerial personnel – The term means the Chief Executive Officer, the Managing Director, the manager, the company secretary, the whole time director, the Chief Financial Officer and such other officer as may be prescribed. [Section 2(51)]

4. Relatives of a key managerial personnel.

5. A firm in which a director or manager or relative is a partner. However, it does not include the firm in which a key managerial personnel (not being a director) or his relative is a partner.

6. A private company where a director or manager or his relative is a member or a director. Again, it excludes the key managerial personnel (not being a director) or his relative.

7. A public company where a director or manager is a director and holds along with his relatives more than 2% of the paid up capital of the company. In this case both the conditions should be satisfied. So if a director or manager is also a director of a public company, but does not hold more than 2% of equity along with relatives, then such company shall not be considered as a related party. Also, if a director or manager holds more than 2% of the equity along with relatives in a public company, but is not a director, then such company shall not be considered as a related party.

8. A body corporate whose board of directors, managing director or manager act in accordance with the advice, instructions or directions of a director or manager. Here, the key managerial personnel (not being director) is not included. Also, if such advice or instruction or direction is given is professional capacity, such body corporate shall not be considered as body corporate.

9. Any person on whose advice or instruction of direction, a director or manager acts is considered as related party. Again, if any key managerial personnel (not being a director) acts as such, that person shall not be considered as related party. Also, if such act is based on advice, direction or instruction in a professional capacity, the person shall not be considered as a related party.

10. A holding company or a subsidiary company or an associate company or another subsidiary of its own holding company shall be considered as a related party. For the purpose of section 188, this clause does not apply to a private company.

11. A director (not being an independent director) or key managerial personnel of the holding company is considered as a related party.

As discussed earlier, the term related party is very crucial in company regulations scenario. The companies have to be very keen in identifying related parties as per the provisions of the companies’ law so as to avoid any complications at a future date.

We find the word ‘relative’ at many places in the above definition. I have not included the elaboration of that term. It shall be the subject matter of next article.

CA. Amol G. Kabra
Author of ‘MyCorporate.in’ Blog